With hysteria mounting about the political shift leftward in Latin America and 11 presidential races in the region over the next 13 months, the World Bank's "Doing Business in 2006" survey merits a read. We mentioned it two weeks ago but a fuller airing is in order.

The annual report, by the research side of the bank, measures the regulatory burden and property rights in 155 countries. This year's results demonstrate clearly that despite persistent claims that the region has tried the "free-market" model and found it wanting, Latin America is stubbornly stuck in a statist time warp.

When it comes to burdensome government and weak property rights, Latins don't fare as badly as Africans but their freedoms lag behind those in much of Asia and the former Soviet satellites of Europe.

It's been 20 years since Hernando de Soto's Lima-based Institute for Liberty and Democracy published "The Other Path," documenting the burdens that the Peruvian state was heaping on the backs of the struggling underclass. But in two decades little has changed in a region mostly known for caudillo government and its capacity to disappoint. More than ever, the Latin predatory state is driving entrepreneurs underground and forcing the most industrious citizens to emigrate, mostly to the U.S.

Take for example Mexico, which has enormous oil reserves and open trade with North America. Its economy is sadly underperforming. Mexican Finance Minister Francisco Gil Diaz has managed the macro side of things exceedingly well. But on the micro side, Mexican businesses face crippling regulation and inadequate legal protections, weakening the potential for market competition, investment and productivity gains.

In the category of the World Bank report that deals with "hiring and firing," Mexico ranks 125th out of the 155 countries surveyed, not least because it costs a firm almost 75 weeks of wages to fire a worker. Mexico also ranks 125th in "protecting investors" against fraud, self-dealing and other corporate abuses. Correspondingly, it ranks 100th in the "enforcing contracts" category, meaning that when two parties strike a deal, neither knows whether it will hold up.

Peru gets a better overall rating than Mexico, but it can hardly be said to encourage entrepreneurship. In "starting a business," Peru ranks a low 106th because of the red tape Mr. de Soto wrote about so long ago. Firing a worker costs almost 56 weeks of wages, discouraging employers from hiring and risking huge costs if business takes a turn for the worse. A medium-sized business in Peru can expect a tax burden reaching almost 51% of gross profits, which is part of the reason Peru has the 133rd worst tax burden. "Enforcing contracts" takes 381 days on average, leaving Peru in 114th place in this category.

Argentina, still saddled with Peronist labor laws, has an even less flexible labor market than Peru, at 132nd in "hiring and firing." Moreover, a medium-sized company must theoretically pay almost 98% of its gross profit to the tax man, which explains a high rate of tax evasion.

In 25th place globally, Chile has the best business climate in the region but is inexcusably behind Malaysia, Estonia and Lithuania. It badly needs to advance reforms undertaken in the 1980s, but instead the Socialist government of Ricardo Lagos has yielded to union activists by increasing labor law burdens.

Colombia -- at 66th -- has dreadful ratings in "hiring and firing" (130th) and in "paying taxes," where a medium-sized business has a total payable tax of 75% of gross profits. Venezuela doesn't enforce contracts (129th), doesn't protect investors (142nd) and makes paying taxes a bureaucratic nightmare (145th). There are some notable improvements among small countries. Honduras gets better marks for making property registration more efficient. El Salvador has quickened "business entry" but still ranks far down the list in this category due to the cost of starting a business.

The correlation between economic freedom and prosperity is clear from reading the World Bank ratings. As one would expect, overtaxing and overregulating economic activity stunts growth, as do weak property rights. Much of the region's stagnation is attributable to burdens inflicted by government.

Why hasn't democracy in Latin America produced change? The answer can be found in public-choice theory -- a school of economics made famous by Nobel Prize winner James Buchanan. Public choice views politics as a market, where the highest bidders have the power to "purchase" what they want. Deregulation may be best for the majority, but politicians don't have an incentive to do it when their most powerful, best-organized constituents -- the ones who put them in office -- prefer the status quo. That includes not only labor unions but rich, established oligarchs and government bureaucrats. Most Latin countries don't have large enough middle classes to counter these oppressive forces, thanks to the twin curses of overregulation and weak property rights.

At the cost of a civil war, El Salvador has had some success in awakening the power elite to the need for change. But most of the region is more like Mexico, where labor unions and a handful of wealthy individuals -- like telecom mogul Carlos Slim and media giant Ricardo Salinas Pleigo -- see no need to reform a system that serves them so well.

On reviewing the World Bank study, it is worth noting that external forces also militate against reform. The International Monetary Fund, the U.S. Agency for International Development, World Bank loan officers and the United Nations provide easy money -- "aid" -- to support failed governments and an entrenched ruling class. "Conditionality" has been a dismal failure. IMF assistance to Argentina worked against challengers to Peronism in the 2003 election and ensured victory for the present anti-market government.

Rich-country bureaucrats also often tie their handouts to objectives favored by rich-country pressure groups, such as environmental and labor "protections" that in the name of "social justice" add more red tape and further destroy individual initiative. All the while, Godzilla government is leaving Latin America's underclass living in the shantytowns and favelas with little opportunity or hope.

Bolivian President Evo Morales signed a decree May 1 by which Bolivia nationalizes its oil and gas resources. Nationalization was one of Morales' main campaign promises. While Morales had apparently flip-flopped on his policies to allow the unrestricted growing of coca, he was facing increasing pressure to act soon on some of his campaign promises. Now he is starting to deliver.

Analysis

On May 1, Bolivian President Evo Morales signed decree 28701, which nationalizes Bolivia's oil and gas resources. This was one of Morales' main campaign promises and sets Bolivia on a course similar to that of countries like Venezuela.

Even before winning the presidency, Morales said he intended to nationalize Bolivia's oil and gas resources. In that sense, this announcement is not a surprise, especially after reports emerging in the first days of April said a law to nationalize the resources was ready to be proposed. If anything, Morales just caught the local media by surprise, having announced it on a holiday. Using the figure of a decree instead of a change in the law, which can come later, also gives Morales an element of surprise to protect the announcement from potential legal challenges. At the same time of the announcement, Bolivian troops took control of several oil fields. The deployment of troops is intended both as a symbolic way to signal that Morales means business and to prevent any attempt to shut down production. Even if the nationalization was not unexpected, the way in which Morales' government has acted shows some heavy-handedness and not much willingness to compromise.

The decree's first details establish that the firms operating in the country will need to hand their production to the state-owned Yacimientos Petroliferos Fiscales Bolivianos (YPFB), which will take over selling the private firms' production as well as its own. The decree further says that private companies have 180 days to sign the new contracts in order to keep operations in Bolivia. Morales had said from the time he was campaigning that he would not confiscate companies' actual facilities and investments.

The main foreign energy companies operating in Bolivia are the Spanish company Repsol YPF, the Brazilian company Petroleo Brasileiro and the French company Total. Morales' decree establishes that those companies that had produced more than 100 million cubic meters in 2005 would only benefit from 18 percent of the production, with the rest of it going directly to the Bolivian government. Companies like Repsol YPF, which had registered the largest amount of reserves, will be affected most by the nationalization. If those details turn out to be true, then it will not leave those companies with many incentives to keep operating in the country.

Morales was facing increased domestic pressure to act quickly to fulfill some of his campaign promises, after having initially flip-flopped on the promise to allow unrestricted coca growing. This seems to be a way for Morales to reconcile himself with the other Bolivian political actors, and it will likely be well received by Bolivia's new partners on the just-signed Peoples' Trade Agreement: Cuba and Venezuela.

Bolivian President Evo Morales followed through on a campaign promise on Monday by nationalizing the country's oil and natural gas industries. The move, which Morales discussed frequently during his first 100 days in power, should not have come as a surprise, but the way in which it was done caught many off-guard. Rather than sending a bill to the legislature, Morales enacted the law by decree, announced it on the national May Day holiday -- to the surprise of Bolivia's own media -- and immediately sent the armed forces to secure oil facilities, seeking to prevent any disruptions in operations. In other words, everything was done in the style of the old Latin American populist governments, with a flair that portends a penchant for theatricality and unwillingness to compromise.

Monday's development raises two questions. First, given Bolivia's poverty and dependence on other countries as shipping routes for its gas exports, will the nationalization policy be sustainable over the long run? And second, is this part of a leftist trend that Venezuelan President Hugo Chavez has been encouraging in the region, or will Bolivia's lurch to the left with the hydrocarbons policy be an isolated case?

Whatever the answer to the first question, Bolivia is hardly an isolated case. Venezuela has set certain precedents by incrementally changing the playing rules for foreign companies: Taxes have been increased, and foreign-owned firms have been forced to enter into joint ventures with the state-owned oil company. Ecuador is now moving down the same path. Quito recently approved a law that allows the government to renegotiate contracts with oil companies, giving the government more than half of the revenues from oil sold above a certain price level. And in Peru, presidential candidate Ollanta Humala has promised to nationalize gas reserves and production if he wins the runoff election. There is indeed a pattern here.

Another pattern appears to have developed on trade issues as well. During the Summit of the Americas (hosted by Argentina in November 2005), a bloc of countries -- vocally led by Venezuela, with backing from Argentina, Brazil and Bolivia -- expressed strong opposition to calls to move forward with the Free Trade Area of the Americas (FTAA). Instead, Bolivia, Venezuela and Cuba during the past weekend signed the Peoples' Trade Agreement -- note the absence of the word "free" -- as a way to promote unity in the Americas and as their response to the FTAA.

That said, not all the countries in Latin America are treading the same course. In fact, there may be more differences than similarities in the policies emerging from the region. Although most of the recently elected governments have been labeled "leftist" and supposedly have common agendas, Latin America is beginning to show signs of deep divisions rather than growing unity. Only the most radical governments have nationalized their energy industries or attempted to change the rules of engagement for foreign-owned companies. Countries like Brazil, Uruguay and Chile -- all of which have elected leaders belonging to old leftist movements -- have not pursued nationalization policies, and in fact the investment environment in these countries has remained at least level (or improved, in comparison to the more radical countries in the region.)

On trade, the countries that favored the FTAA did not sit back and wait for Chavez or Argentine President Nestor Kirchner to take the lead or declare it a good idea -- they moved ahead to negotiate bilateral agreements with the United States themselves. Colombia and Peru already have signed their respective agreements, although they still await ratification. Ecuador also has engaged in negotiations with the United States, although the approval of Quito's version of the hydrocarbons law has stalled talks. As a result of all of this, Chavez decided last week to pull Venezuela out of the Andean Community of Nations -- a group that includes Colombia, Ecuador, Peru and Bolivia -- saying (with Bolivia's agreement) that it is incompatible to seek trade agreements with the United States and fellow Latin American states at the same time. Colombia and Peru, defying Chavez's strange economic logic, have decided to move ahead with their U.S. trade deals.

Deeper south, integration has suffered as well. Uruguay and Paraguay have questioned Mercosur's current structure, claiming that Brazil and Argentina run rough-shod over the small members of the trade bloc. Uruguayan President Tabare Vazquez has labeled the organization -- which comprises Brazil, Argentina, Uruguay and Paraguay -- "useless" and called for reform. At the same time, Vazquez has been looking to launch free-trade talks -- or at lest an investment agreement -- with the United States, and he is scheduled to meet this week with U.S. President George W. Bush.

All in all, Venezuela's Chavez appears to have been sowing division among his neighbors rather than uniting Latin America behind the project he envisions for Venezuela. He has engaged in bitter verbal spats with President Vicente Fox of Mexico, with President Alejandro Toledo Manrique of Peru and with Peruvian presidential contender Alan Garcia. It is true that Peru, Mexico and Nicaragua still might elect leaders who would be closer to Chavez ideologically than to the United States or other moderate Latin American leaders. But despite that, it is not entirely clear that all of them would follow the same policy path. It is considerably more likely that divisions will persist among Latin American states. Economic realities place clear constraints on the policies that the governments of the region can follow.

Thus, with economic and geographic realities in mind, we return to Bolivia and our first question: Are the nationalization policies sought by Morales sustainable?

Though Bolivia has South America's second-largest reserves of natural gas, its hydrocarbons industry remains quite underdeveloped. The country currently exports most of its gas to and through Brazil (whose state-owned Petrobras is one of the main foreign companies in Bolivia's hydrocarbons industry). By expropriating the hydrocarbons -- or, to be even more to the point, by reducing the status of foreign companies to mere operators of oil and gas fields -- Bolivia will obstruct flows of new investment and strain its relationship with Brazil. Considering that Morales came into office strongly opposed to a plan that would build a gas export line through Chile, he basically would have only one other route to get the gas to market if Brazil was alienated: through Paraguay, Argentina and Uruguay. But such a pipeline would take years to construct. And though Chavez has pledged support to his friend in Bolivia, it is not clear whether he can do much to help out, especially since the two countries do not share a border.

Morales has made good on one of his chief campaign promises, but doing so might hurt the indigenous population he wants to lift out of poverty more than it helps. The gas deposits are now theirs, but without assistance, the Bolivians will find it difficult to develop or export the gas. The alternative, in the less-than-diplomatic words of Mexico's President Fox: They might have to eat it instead

Latin Energy FadMay 3, 2006; Page A14Latin culture is all the rage these days, from Botero sculptures and Shakira's "Hips Don't Lie," to burritos and margaritas. So maybe we shouldn't be surprised that Bolivia is getting in on another Latin craze: the abrogation of contracts.

We refer to President Evo Morales's pronouncement on May 1 -- not a coincidental date -- to tear up Bolivia's agreements with foreign investors in the natural gas industry and take, in his words, "absolute control" of Bolivia's natural resources. Kicking out foreign investors by executive decree sounds a lot like the same authoritarian nationalist populismo that has earned Bolivia the only prominence it has ever enjoyed: South America's poorest nation.

The Morales move shocked markets but not for its originality. The newly inaugurated president is following the lead of Venezuelan President Hugo Ch?vez, who is a knock-off of Argentine strongman Juan Peron. Peron is long since dead but his spirit lives on in his party, which has been the 21st century's trend setter in the assault on property rights. In 2001 and 2002, Argentina's Peronistas reneged on their commitments not only with foreigners but with their own people, declaring a debt moratorium, tearing up utility contracts, confiscating dollar bank accounts and devaluing the peso.

Se?or Ch?vez followed suit after a fashion. He canceled contracts with foreign oil companies last month, demanding that the government oil company be given majority ownership and operational charge of oil fields. New terms offered to investors are also far less profitable. Some have agreed to stick it out, but Exxon Mobil sold its operations and when France's Total and Italy's ENI SpA refused to give in, Mr. Ch?vez responded by seizing their operations.

Like all fads, this one has its surface appeal. Argentina cleared its balance sheets by sticking it to its creditors and tearing up contracts. Its economy is still growing four years after its theft of private-sector assets, and it may even believe it's gotten something for nothing.Yet the real predictor of a country's economic future lies in its investment rate. Economists estimate that to achieve steady long-term growth of 3.5% to 4%, Argentina needs an investment-to-GDP rate of at least 23%. To reach 5%, a more reasonable target for a quasi-developed country, it needs 25% investment to GDP. Yet last year's investment rate was a measly 19.8% and today's rate is only 22%. In other words, there are lots of places to put capital these days and few are rushing into Buenos Aires.

It may be that Mr. Morales has been emboldened by the petro wealth of Venezuela. But that country, too, is having trouble sustaining investment in energy production. Thanks to rampant corruption and the government's use of energy profits for buying support for socialism at home and around the region, Venezuela's oil fields are suffering from under-investment. Given an annual depletion rate of 25%, the only thing not clear is how long it will take to run the sector completely dry.

Bolivia to date has had only about $3.5 billion in foreign investment in natural gas, not nearly enough to exploit its vast reserves in the future. Even if Brazil's Petrobras and Spain's Repsol YPF decide to stay and accept the operating terms laid down by President Morales -- including a tax of 82% on natural gas extracted from country's two biggest fields -- new investment is unlikely to be nearly so brave.

Which means Bolivia would become either less productive or highly dependent on state-owned foreign companies from Venezuela or perhaps Russia. Neither option bodes well for the country's sovereignty, much less its prosperity.

A series of events in recent weeks appears to signal growing disenchantment in Latin America with Venezuelan President Hugo Chavez. Bolivia's May 1 nationalization of its energy sector has only served to fuel this nascent anti-Chavez backlash.

Analysis

Over the past few weeks, several Latin American leaders have issued statements criticizing Venezuelan President Hugo Chavez, while two presidential candidates have openly campaigned against the Chavez model for the region. Although strong words against the Venezuelan president are not unusual in Latin America, the intensity of the anti-Chavez sentiment has grown since Bolivian President Evo Morales nationalized his country's energy sector May 1 -- a move that bears a strong Chavez imprint.

Since assuming power in 1999, Chavez has directed his rhetoric at pushing his Bolivarian dream -- Latin American economic and political integration, and isolation from the United States. Today, however, the region looks far from united, due to increasing differences between the countries on a wide set of issues. Although Chavez is not entirely to blame for this state of affairs, his incessant comments on -- and downright meddling in -- the internal affairs of others appear to be undermining his own efforts to attain that dream.

Victories in recent years of left-leaning parties in Latin America have increased U.S. concerns that a strong anti-American alliance, one hostile to foreign investment, would emerge. Bolivia and Venezuela, for example, have instituted the kinds of policies investors fear most. Not all the "leftist" governments in Latin America are the same, however. In fact, some are closer to European-style social democracies, while others are similar to the old-style populist governments that ruled in the region for decades.

While nationalism is a common thread among most Latin American leaders, little else really unites them -- and the current bickering among the different countries and their blocs only enhances their differences. A good number of these countries, however, seem to have found a common bond: concern about Chavez's influence inside their borders and a desire to contain him. As a result, the region is at a crossroads of sorts. Some new elements on the table could serve to strengthen the nascent anti-Chavez movement, but differences in other areas could make it difficult to sustain a containment bloc.

Although criticism from Venezuela's neighbors of Chavez's attempts to extend influence in the region is not a new phenomenon, the difference this time is that a larger number of countries -- Peru, Guatemala, El Salvador, Nicaragua, Mexico and Brazil -- all have openly criticized Chavez over the past three weeks.

In Peru, where Chavez has openly called for the election of newcomer Ollanta Humala, President Alejandro Toledo Manrique and former president and current candidate Alan Garcia have both responded harshly to Chavez's meddling, especially after he compared them to one another. Garcia has invoked Chavez's name as part of his campaign strategy, saying Chavez is attempting to create satellite states and that he has the luxury of coming out against free trade and foreign investment because his country has plenty of oil. As a result, Garcia has jumped ahead of Humala by more than 12 points in most polls. Three weeks ago, polls had Humala and Garcia tied in a runoff scenario ahead of the June 4 election. The polls also show that more than 60 percent of Peruvians have a negative opinion of Chavez and only 17 percent have a favorable one. Meanwhile, 84 percent of those surveyed consider him an authoritarian leader. Chavez's support, which fueled the rise of Humala, might now be a liability.

In designing his strategy, Garcia might have copied Mexico's Felipe Calderon, the National Action Party's presidential candidate. After months of running behind in the polls, Calderon has begun to take on the Revolutionary Democratic Party's Lopez Obrador, releasing a series of televised ads that pair Chavez and Lopez Obrador -- and highlight their authoritarian tendencies. These ads, as well as other actions by Lopez Obrador -- such as his unwillingness to participate in the first televised debate -- have pushed him into second place for the first time since he declared his candidacy. It appears the Mexican public is growing concerned about the possibility of electing another Chavez or Morales on July 2. Lopez Obrador probably could not follow in the steps of the Bolivian and Venezuelan leaders, even if he wanted to, but Mexican voters are starting to have second thoughts regardless.

Meanwhile, Chavez might be starting to lose his appeal among the citizens of other countries as well. When Latin Americans start looking at the possibility of a return to the tough economic times of the 1970s and the 1980s, they might find populist alternatives not that appealing.

Perhaps Chavez's biggest problem, however, is that his meddling is awakening South American powerhouse Brazil. In the past, Chavez has counted on Brazilian President Luiz Inacio "Lula" da Silva as his friend and ally on issues such as trade and energy. However, Chavez's visible role in the nationalization of Bolivia's energy sector -- a move that affects Brazil most directly -- is seen as a direct challenge to da Silva. Moreover, Chavez's influence represents a challenge to Brazil's standing in the continent, and its sphere of influence.

Despite da Silva's call for an immediate summit with Argentine President Nestor Kirchner and the leaders of Bolivia and Venezuela following the nationalization decree -- as well as a series of relatively tough statements by Brazil's foreign minister and the president of Brazil's state-owned energy firm -- Brazil's other political parties and its business sector have criticized da Silva for his "weak" response to Chavez. Taking into account the relatively close relationship between the two leaders before these events, however, da Silva appears to be clearly marking his distance -- especially when one of his direct criticisms of Chavez came during the European Union-Latin America summit. While Chavez is accustomed to meddling in the affairs of governments that cannot do much against him, he now runs the risk of facing an angry Brazil.

Chavez, meanwhile, has other irons in the regional fire and could use his influence to further fuel the differences between countries in the Andean Community (Peru, Ecuador, Bolivia and Colombia) and Mercosur (Brazil, Argentina, Paraguay and Uruguay). He has been siding with Argentina in its dispute with Uruguay over construction of paper plants along their shared border, for example. Uruguay, meanwhile, has threatened to abandon Mercosur -- but to associate with Washington, not with Caracas. These games have tested Brazil's patience, which appears to be running out.

Chavez could be facing a decline in his popular support in the region. At the same time, he appears to have angered the largest country in South America. In order to assure his own re-election -- and defend Brazil's economic interests -- da Silva will need to show he cannot be overshadowed by Chavez. For starters, Brazil could stop cooperating with Caracas on a variety of projects, including the South American pipeline.

For the United States, the bickering between Latin American states could not come at a better time. Washington is focused on Iraq, Iran, Russia and China -- not to mention U.S. President George W. Bush's problems on the home front -- and Chavez represents a painful thorn in the side. Should the other Latin American countries take care of that problem, so much the better for the United States.

?LATIN AMERICA doesn't matter...people don't give one damn about Latin America.? So said Richard Nixon, offering career advice to a young Donald Rumsfeld. With the bloody exception of the Central American wars of the 1980s, Nixon was right?until now. Suddenly Latin America has grabbed the world's attention. There are several reasons for this. But they come down to the notion that, after two decades in which country after country in the region seemed to embrace liberal democracy and market capitalism, something fundamental is changing.

A spectre has arisen, one of anti-American leftist nationalism. Ecuador this week became the latest Latin American country to kick out a foreign energy company?in its case, Occidental. But there are plenty of other signs that all is not well. The crime mobs created by foreign demand for cocaine continue to run amok. More than 100 people have died in a fight between one of these mafias and the state in S?o Paulo, the region's most modern metropolis (see article). The tide of migrants fleeing lack of opportunity in Latin America has become a bitter issue north of the border, especially with the Republican right. That has prompted George Bush to offer up to 6,000 National Guard troops to patrol the border (see article). His administration has also announced a (largely symbolic) ban on arms sales to Venezuela, which is run by the noisiest of the anti-Yanqui nationalists, Hugo Ch?vez, because, it is claimed, he is not co-operating in fighting terrorism.

Yet to portray what is happening in the Americas as a battle between the United States and its Latin neighbours is mistaken. Latin America does matter?but not quite, or not only, for the reasons commonly believed. The battle being waged is one within Latin America over its future. It is between liberal democrats?of left and right?and authoritarian populists. Latin America's efforts to make democracy work, and to use it to make searingly unequal societies fairer and more prosperous, have implications across the developing world.

Those efforts suffered a severe blow in 1998-2002, when the region suffered financial turmoil and economic stagnation. Rightly or wrongly, voters blamed the slowdown on the free-market reforms known as the Washington consensus. As happens in democracies, they started to vote for the opposition?which tended to be on the left. Yet in Latin America, as this newspaper has often noted, the differences among the left-wing governments are more important than the similarities.

Broadly speaking, one camp is made up of moderate social democrats, of the sort in office in Chile, Uruguay and Brazil. The other camp is the radical populists, led by Mr Ch?vez, who appears to have gained a disciple in Evo Morales, Bolivia's new president. The populists shout louder, and claim that they are helping the poor through state control of oil and gas. Neither Mr Ch?vez nor Mr Morales is from the ?white? elites who, in caricature at least, have long ruled in the region. Both direct volleys of abuse at Mr Bush. For all these reasons, the populists have captured the sympathy of ignorant paternalists abroad, such as London's mayor, Ken Livingstone, who this week welcomed Mr Ch?vez as ?the best news out of Latin America in many years?.

The facts speak otherwise. Yes, after seven years in power and a massive oil windfall, Mr Ch?vez has finally created some health and education programmes for the urban poor. At last, poverty is falling (though it is still around 40%) in Venezuela?but it would be extraordinary if it were not, given the oil price. Yes, Mr Ch?vez has twice been elected and remains popular. But he is running down his country's wealth. Having dismantled all checks, balances and independent institutions, his regime rests on his personal control of the state oil company, the armed forces and armed militias.

Look around the rest of Latin America, and there is plenty of better news. In the current spate of elections, the populists are not carrying all before them. That is partly because the region's economies are now doing well again (see article), but it is also because some democrats seem to have learnt a salutary lesson. This is that governments neglect education, health and anti-poverty programmes at their peril.

Governments in Chile, Colombia, Mexico and Brazil are starting to achieve sustained reductions in poverty?and even in inequality? partly by more effective social policies. The difference will become even clearer when commodity prices fall and the economic cycle turns. Chile will then be able to maintain its social programmes by spending what it has saved from its copper windfall. By contrast, Venezuela's future may resemble not Cuba, as some of Mr Ch?vez's opponents fear, but Nigeria?a failed petro-state.

In place of drugs and migrants

It has become commonplace to berate Mr Bush for ?losing? Latin America. But that is to overstate the influence of the United States in South America and Mexico (though not in the smaller countries of the Caribbean basin). Relations between the two halves of the Americas are not as good as a decade ago, yet the bigger change is the disarray within Latin America itself, largely provoked by Mr Ch?vez and his allies (who include Fidel Castro, Cuba's communist gerontocrat).

That said, the Bush administration could do more to help. Mr Bush's gesture towards tightening border security is a blow to America's friends in Mexico. If it is the price for approving the Senate's version of immigration reform, which includes routes to citizenship for illegals and expands legal migration, so be it. But it would help Latin America greatly if the United States coupled its trade deals with a more generous partnership for development, including targeted help with infrastructure?and if it accepted that its ?war on drugs? has failed.

Meanwhile, democrats everywhere?including in Europe and in Latin America itself?need to make it clear on which side of the battle they stand. They should not welcome Mr Ch?vez in their midst unless the presidential election in Venezuela in December is demonstrably free and fair. Restoring democracy in Latin America cost too much blood for the achievement to be lightly thrown away.

By JUAN FOREROPublished: May 20, 2006BOGOT?, Colombia, May 19 ? As Venezuela's president, Hugo Ch?vez, insinuates himself deeper in the politics of his region, something of a backlash is building among his neighbors.

Mr. Ch?vez ? stridently anti-American, leftist and never short on words ? has cast himself as spokesman for a united Latin America free of Washington's influence. He has backed Bolivia's recent gas nationalization, set up his own Socialist trade bloc and jumped into the middle of disputes between his neighbors, even when no one has asked. Some nations are beginning to take umbrage. The mere association with Mr. Ch?vez has helped reverse the leads of presidential candidates in Mexico and Peru. Officials from Mexico to Nicaragua, Peru and Brazil have expressed rising impatience at what they see as Mr. Ch?vez's meddling and grandstanding, often at their expense.

Diplomatic sparring has broken into the open. Last month, after very public sniping between Mr. Ch?vez and Peru's president, Alejandro Toledo, the country withdrew its ambassador from Caracas, citing "flagrant interference" in its affairs.

"He goes around shooting from the hip and shooting his mouth off, and that has caused tensions," Jorge G. Casta?eda, a former Mexican foreign minister, said by phone from New York, where he is teaching at New York University. "The difference now is that he's picking fights with his friends, not just his adversaries."

Some of Mr. Ch?vez's gestures, like his tendency to tweak the Bush administration, or the aid projects he has bankrolled with Venezuela's oil money, still leave him popular, particularly among the poor.

But increasingly, the very image of the Venezuelan leader has come to stand for a style of caustic nationalism that many in the region fear, as the divisions provoked by the man who professes to want to unify his region have widened.

"He is beginning to overreach, wanting to be involved in everything," said Riordan Roett, director of Latin American studies at Johns Hopkins University's School of Advanced International Studies. "It's a matter of egomania at work here."

Mr. Ch?vez, for instance, has taken the uncompromising stand that governments must choose either his vision of continental unity or free trade with Washington, which Mr. Ch?vez blames for impoverishing the region. "You either have one or the other," he said. "Either we're a united community or we're not."

In late April, he exasperated Colombia, Ecuador and Peru by declaring that Venezuela would drop out of their trade group, the Andean Community of Nations, because the other three members were seeking free trade agreements with the United States. He has instead formed a trade bloc with Cuba and Bolivia's new Socialist government.

While the move was filled with political symbolism, analysts say it offers few real prospects for trade and threatens badly needed integration among Andean countries, which still depend on United States markets.

"Ch?vez's idea of sovereignty seems pretty selective," said Michael Shifter, a senior policy analyst at the Inter-American Dialogue policy group in Washington. "Ch?vez has been saying, in effect, 'You're either with us or against us.' For most Latin Americans that hubristic message doesn't go over very well, whether it comes from Washington or Caracas."

The sparring with Peru's government erupted last month after President Toledo said it made no sense for Mr. Ch?vez to criticize his Andean partners for dealing with Washington when Venezuela sells most of its oil to the United States.

But he saved his strongest words for Mr. Ch?vez's general involvement in Peruvian affairs.

"Mr. Ch?vez, learn to govern democratically," Mr. Toledo said. "Learn to work with us. Our arms are open to integrate Latin America, but not for you to destabilize us with your checkbook."

When Alan Garc?a, a candidate in Peru's June 4 presidential election, also took Mr. Ch?vez to task, the Venezuelan president responded with, among other things, an endorsement of his opponent.

"I hope that Ollanta Humala becomes president of Peru," Mr. Ch?vez declared, backing Mr. Garc?a's nationalist opponent, who has modeled himself on the Venezuelan leader. "Go, comrade! Long live Ollanta Humala! Long live Peru!"

Mr. Ch?vez called Mr. Garc?a, a former president whose tenure was marred by corruption scandals, "shameless, a thief," and warned that if he were elected "by some work of the devil," Venezuela would withdraw its ambassador.

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But it was Peru that made the move first. Venezuela soon followed, and the Ch?vez government responded by calling Mr. Toledo an "office boy" for President Bush. Mr. Garc?a benefited handsomely, taking a long lead in the polls.

Surveys showed Peruvians had little patience for Mr. Ch?vez's interference. Only 17 percent of Peruvians said they had a positive view of the Venezuelan leader, the Lima-based Apoyo polling firm found. In Nicaragua, Mr. Ch?vez has thrown his support behind Daniel Ortega, the former leader of the communist Sandinista revolution, who is running for president in November elections.

"I shouldn't say I hope you win because they will accuse me of sticking my nose into Nicaraguan internal affairs," Mr. Ch?vez told Mr. Ortega, who was invited on his radio show in late April. "But I hope you win."

Mr. Ch?vez pledged to supply cheap fuel to a group of Sandinista-run towns. The gesture was interpreted by opponents as a naked ploy to influence the vote and criticized as a backhanded way to funnel money to the Ortega campaign.

Nicaragua's government called on Mr. Ch?vez to stay out. "We hope this partisan support comes to an end so that Nicaraguans can freely choose who we want to be the next leader of Nicaragua," Foreign Minister Norman Caldera told Nicaraguan television this month.

The American ambassador to Nicaragua, Paul A. Trivelli, speaking to Nicaraguan media, accused Mr. Ch?vez of "direct intervention," but analysts said it was too soon to say what effect Mr. Ch?vez would have on the vote.

In Mexico, the leftist candidate in the July presidential election, Andr?s Manuel L?pez Obrador, has labored to distance himself from Mr. Ch?vez, to no avail.

When he made a slip of manners recently, calling President Vicente Fox a chattering bird and telling him to shut up, his conservative opponent, Felipe Calder?n, ran a series of attack advertisements intercutting the gaffe with images of Mr. Ch?vez, whose tendency to hurl insults is a trademark. (He has called Mr. Bush a drunkard and Mr. Fox a "puppy dog of the empire.")

In recent weeks, Mr. L?pez Obrador's lead in the polls has evaporated, and he now trails his opponent.

The disputes are not limited to politics, however, but also touch important national interests.

Mr. Ch?vez, for instance, encouraged and quickly supported Bolivia's nationalization of its energy sector this month, a move that infuriated Argentina and Brazil, which depend on Bolivian natural gas.

Though Venezuela was not a party to the dispute, Mr. Ch?vez joined a meeting of leaders from Brazil, Argentina and Bolivia aimed at calming the crisis, and dominated a news conference afterward, upstaging even his Bolivian prot?g?, President Evo Morales.

President Luiz In?cio Lula da Silva of Brazil, steward of South America's largest economy and nominally a left-wing ally of Mr. Ch?vez, was particularly humiliated. Celso Amorim, the foreign minister, was called before senators and quizzed about Brazil's weak response. He said Mr. da Silva had admonished the Venezuelan leader in a private phone call, telling him that the Bolivian move could jeopardize Mr. Ch?vez's dream of a 5,000-mile pipeline to carry Venezuela's gas to Argentina.

Mr. da Silva also rebuked Mr. Ch?vez, he said, for involving himself in a dispute that Brazil is having with Uruguay and Paraguay over their trade bloc, Mercosur, saying Mr. Ch?vez's role was "a stimulant to activities incompatible with the spirit of integration."

The wounds have yet to heal. Jorge Viana, the governor of Acre state in Brazil, and a crucial ally of Mr. da Silva, told Brazilian radio last week that Mr. Ch?vez's meddling was "lamentable." He criticized Mr. Ch?vez's "precipitated decisions to interfere in the internal affairs of Bolivia, Peru and, by extension, those of Brazil." Mr. Ch?vez, he said, "needs to calm down."

Crime and Militancy in South America's Tri-Border AreaSometime this fall, Brazil, Argentina and Paraguay will join forces on an intelligence center aimed primarily at combating criminal and militant activity in their tri-border area (TBA). The expected U.S. cooperation in the center is an example of increasing vigilance by Western intelligence in the region, where a combination of geography, corruption, weak governments and an influx of investment has spawned what is now a flourishing organized crime industry -- and in turn opened the doors to militant groups.

The TBA, which sits at the intersection of the Parana and Iguazu rivers, comprises Ciudad del Este in Paraguay, Foz do Iguazu in Brazil and Puerto Iguazu in Argentina. Ciudad del Este is connected to Foz do Iguazu by the east-west Bridge of Friendship, while Puerto Iguazu is connected to Foz do Iguazu by the north-south Tancredo Neves International Bridge.

Because of tourist attractions such as Iguazu Falls, Brazil and Paraguay heavily promoted tourism and energy development in the region during the 1970s. As a result, Brazil, Argentina and Paraguay entered into free trade agreements and rapidly developed regional infrastructure. Today, Ciudad del Este generates an estimated 60 percent of Paraguay's gross domestic product and is the third-largest free-tax commerce zone in the world, after Miami and Hong Kong. Because of the job opportunities, the area attracts immigrants from the Middle East, Asia and former Soviet Union. With the free trade agreements and infrastructure development bringing investment into the TBA -- and little law enforcement oversight -- corruption soon followed.

Money laundering, cargo theft, drug trafficking, gun-running and other criminal activities all take place in the TBA. Beyond the lax law enforcement, the TBA also is popular with criminals because the rivers, roads and bridges in the area provide easy access to transportation networks. The Parana River, for example, leads to the port of Buenos Aires and the Atlantic Ocean, from which stolen or diverted shipments can be sent anywhere in the world.

This criminal presence, combined with lax law enforcement and corruption, has attracted militant groups as well. Relying on contacts and supporters within the TBA's large Arab community (predominantly ethnic Lebanese), Hezbollah has used the area as a logistics and transshipment base for years. The U.S. government also has investigated money-laundering and counterfeiting operations linked to Hezbollah and Hamas in the region. Hezbollah has used the TBA to support attacks against Israeli targets, most likely including the 1992 and 1994 attacks against the Israeli Embassy and Jewish Community Center in Buenos Aires. Other groups, especially the Revolutionary Armed Forces of Colombia, also use the TBA to support themselves via drug trafficking and other illegal activities.

These activities have not gone unnoticed by the United States. As a result, intelligence cooperation between the United States and Brazil, Argentina, and Paraguay began in earnest in 2002 with the establishment of the 3+1 Group, which monitors events that could affect security in the area. Paraguay, as the poorest of the three countries, has been perhaps the most eager recipient of the U.S. spending in the area. In July 2005, the United States first began deploying troops to Paraguay to train local security forces in counternarcotics operations. The FBI also has plans to open a field office in the Paraguayan capital of Asuncion in 2007.

Meanwhile, the three South American countries plan to join forces soon on an intelligence center established by Brazil in Foz do Iguazu in 2005. The new regional center will focus primarily on tracking the movements of criminal and militant groups in the TBA. Although the United States is not a financial sponsor of the facility, the U.S. State Department said in August that it "looks forward" to working with its partners in the 3+1 Group "on many important aspects of security in the tri-border area."

Despite the added vigilance in the TBA, however, corruption and weak government control will make eliminating organized crime and militant activity a difficult task.www.stratfor.com

What do you get when you cross a Venezuelan Bolivarian with an Argentine Peronist? Answer: a power-hungry demagogue who doesn't believe in paying debts.

That would be funnier if just such a hybrid -- Rafael Correa -- hadn't recently popped up as Ecuador's leading presidential candidate for the Oct. 15 election. Polls out this week show that Mr. Correa has surged from a distant third place only one month ago to first place, 10 percentage points ahead of his closest competitor. He is shy of what he needs for victory in the first round of balloting, and 40% of the electorate remains undecided. But Ecuadoran democrats have good reason to fear his growing popularity.

The 43-year-old Mr. Correa, who has a Ph.D. in economics from the University of Illinois, has railed against the cost of servicing Ecuador's foreign debt, the dollarized economy and free-trade talks with Washington. If he makes it to the seat of power in Quito, he has made it clear that Ecuador will join the Latin American axis of outcasts -- Venezuela, Cuba, Bolivia and Argentina -- and make the U.S. an official enemy. A Correa presidency would be a negative for Colombia too, which would have to deal with hostile states on two borders along with home-grown narcoterrorism.

Yet what is most troubling is Mr. Correa's pledge to raze the political system and rebuild it to ensure his long-term agenda. If that sounds familiar, it may be because it is precisely what Venezuelan President Hugo Ch?vez promised to do when he took office in 1999. Since then Mr. Ch?vez has demolished any independence in the country's institutions, seized control of the economy, militarized the government and run the private sector into the ground. He says he plans to remain in power until 2021. If some Ecuadorans are frightened by Mr. Correa, it's because he has made so clear his intention to follow Mr. Ch?vez's path to unchecked power.

The candidate's appeal is easy enough to understand. In a country where more than 45% of the population still lives below the poverty line, many voters are out to punish the established political class. Their anger is rational. When Ecuador dollarized in 2000, the country experienced stability for the first time in decades. But, bowing to special interests, politicians stopped there, failing to modernize the financial system and further open and deregulate the economy. The end of inflation has been a boon to the poor, but with mediocre economic growth rising expectations have not been met. Along comes the charismatic Mr. Correa, billed as an "outsider" to the political system and threatening to trash the capitalists. At least some voters are enthralled.

As it turns out, though, Mr. Correa has had his hand in Ecuadoran politics more than he wants to admit. He did, after all, hold the job of minister of the economy for a short time last year until his resignation was accepted when he visited Mr. Ch?vez in Caracas without the permission of President Alfredo Palacios. During his tenure there was a rapid deterioration in the country's relationship with foreign investors and the international financial institutions. He also raised salaries for public-sector employees, surely helping his poll numbers in bureaucracy-bloated Quito. After he left his post in the ministry, his replacement followed through on the Correa plan to expropriate Occidental Petroleum's Ecuadoran assets.

Dollarization, which brought inflation down to 3.1% last year from persistent double-digit levels in the 1990s, is so popular -- 70% of Ecuadorans love it -- that Mr. Correa has had to tone down his hostility. Whereas he used to say that dollarization ruined the economy, he now claims to be agnostic about it. Yet all his other policies, which are designed to choke off foreign investment, close down international commerce and increase government spending, will ensure that in the end dollarization cannot survive. Once he reclaims control of money creation, devaluations, inflation, exchange controls and price controls won't be far behind. As the owner of the country's largest source of hard-currency revenues -- oil -- the government will have little trouble destroying the private sector and controlling dissent. This is a page out of his Venezuelan guru's playbook, as is his promise to hold a constituent assembly to rewrite the constitution.

On the campaign trail Mr. Correa has become a caricature of his more experienced teacher. After Mr. Ch?vez made a fool of himself at the United Nations two weeks ago in a rant calling President Bush the devil, Mr. Correa rushed to outdo him. In a nationally televised interview in Ecuador a week later the presidential candidate said that Mr. Ch?vez had insulted Satan.

University of Illinois professor Werner Baer, who was on the committee to approve Mr. Correa's doctorate, told the Associated Press last month that Mr. Correa's anti-Americanism is probably just a ploy to help him get votes, not the way in which he would govern. But Prof. Baer might be underestimating his former student's ambition. Markets are not nearly as sanguine. When the polls showing Mr. Correa's 10-point lead came out on Tuesday, investors dumped Ecuadoran bonds and the country's risk premium shot up.

The immediate concern is his pledge, if elected, to break contracts with foreign bondholders and demand a negotiated restructuring. In August Mr. Correa took a trip to Buenos Aires to meet with the dean of deadbeats, Argentine President N?stor Kirchner. If you're planning to stiff creditors, Mr. Kirchner is the go-to guy.

There is some speculation that Mr. Correa's campaign is peaking. If he doesn't get 50% plus one, or 40% with a 10% spread over the second-place finisher, on Oct. 15, there will be a second round. In that event, the more sensible, less interventionist ?lvaro Noboa, a wealthy businessman from Guayaquil who defends dollarization, free-trade agreements and good relations with the U.S. and is now polling in a statistical tie for second place, could upset him. That's because, despite all the blather from the left about anti-Americanism in Latin America, a majority of voters may be more worried about Venezuelan imperialism and the return of inflation than a Yankee invasion

• Iran's president met with Nicaragua's president Sunday in Managua• Mahmoud Ahmadinejad met with Venezuela's president Saturday• Hugo Chavez, Ahmadinejad join for projects to combat U.S. influence• Ahmadinejad said Latin American nations will work together against America Adjust font size:

MANAGUA, Nicaragua (AP) -- Iran's hardline president expanded his courtship of allies in his standoff with Washington on Sunday.Iranian President Mahmoud Ahmadinejad pledged deeper ties with Nicaragua's leftist leader through the opening of new embassies in each other's capitals.

Ahmadinejad was in Managua as part of a whirlwind series of meetings with Latin America's newly inaugurated leftist leaders. He visited fellow OPEC member Venezuela on Saturday, vowing with President Hugo Chavez to spend billions of dollars financing projects in other countries to combat the global influence of their common enemy, the United States.Ahmadinejad's tour comes as he faces rising criticism at home for his handling of the international debate over his country's nuclear program and its alleged meddling in Iraq.

Conservatives and reformists alike have blamed his provocative remarks for increasingly isolating Iran, which now faces sanctions for refusing to halt uranium enrichment.

President of a fundamentalist Shiite theocracy deeply hostile to Washington, Ahmadinejad met with Nicaragua's newly inaugurated leftist President Daniel Ortega.

Ortega's first government faced a U.S.-backed guerrilla insurgency during the 1980s.

The leaders announced they would open embassies in each other's capitals, strengthening ties between two countries that have had little interaction yet share long and troubled histories with the U.S.

Their paths crossed in the 1980s during the Iran-Contra affair during which the U.S. secretly sold arms to Iran to free American hostages. The U.S. then used some of the proceeds to back Contra rebels who fought Ortega's first, Soviet-backed government."Our two counties have common interests, enemies and goals," Ahmadinejad said. "We may be far apart, but we are close in heart."

Ortega, however, did not match Ahmadinejad's confrontational rhetoric in his remarks Sunday. The Nicaraguan president instead focused on how Iran and Nicaragua should work to help the developing world.

He spoke of "constructive agreements to combat hunger, unemployment and poverty."

While pledging close ties with Ahmadinejad, Ortega has tried to start his new government on a cordial note with the U.S. government. His measured remarks also contrasted those of Chavez, who railed against America during Ahmadinejad's visit to Venezuela on Saturday. (Full story) Later in his visit to Nicaragua, Ahmadinejad toured a poor, trash-strewn neighborhood in Managua, where barefoot children on their parents' shoulders waved flags from Ortega's Sandinista party.

"The imperialists don't like us to help you progress and develop. They don't like us to get rid of poverty and unite people," he said. "Iran, Nicaragua and Venezuela and other revolutionary countries are together and we will resist together."

Ortega and Ahmadinejad are expected to sign a cooperation agreement. On Monday, the Iranian leader will attend the inauguration of Ecuador's new president, Rafael Correa, and meet with Bolivian President Evo Morales. Both are both outspoken critics of the Bush administration's policies in Latin America. Venezuela and Iran, both oil-rich nations, had previously announced plans for a joint $2 billion fund to finance investments in their own countries. But Chavez and Ahmadinejad said Saturday the money would also be used for projects in other countries. Chavez is a close ally of Cuban leader Fidel Castro whom Washington sees as a destabilizing influence. He has pledged billions of dollars to the region in foreign aid, bond buyouts and preferentially financed oil deals.

Iran, meanwhile, is accused of bankrolling militant groups in the Middle East like Hamas and the Islamic Jihad, as well as insurgents in Iraq. On Saturday, the U.S. military said five Iranians arrested in northern Iraq last week were connected to an Iranian Revolutionary Guard faction that funds and arms insurgents in Iraq. Ahmadinejad did not respond to those allegations while in Managua.

Iran's Foreign Ministry on Sunday denied reports that nuclear activities had stalled at one of its uranium enrichment plants and reiterated it would press ahead with its nuclear program.

The West fears that Iran could be using uranium to make atomic weapons.

Copyright 2007 The Associated Press. All rights reserved.This material may not be published, broadcast, rewritten, or redistributed.

Hugo and MahmoudJanuary 17, 2007; Page A18We've known for some time that Hugo Chávez is a menace to the economic well-being of his own people. But the question that seems increasingly urgent is whether he's becoming a threat to U.S. security interests -- both in the Western Hemisphere and beyond.

Specifically, we'd like to know what Senator Chris Dodd and Congressman Bill Delahunt make of Mr. Chávez's weekend summit with Mahmoud Ahmadinejad. The Iranian President stopped by Caracas on Saturday as part of a four-day engagement with Latin America's new leftist governments. On Sunday, the Iranian communed with Nicaragua's new boss, Daniel Ortega, and then on Monday he hit the inauguration of Ecuador's new pro-Chávez President Rafael Correa.

The Caracas visit was Mr. Ahmadinejad's second in four months. "This is just a prelude of what we will do," declared Mr. Chávez, in a televised speech announcing the creation of a joint $2 billion fund to finance development and other projects. "This large and strategic fund, brother, is going to be converted into a mechanism of liberation," he added, saying their goal is to build "a network of alliances."

In Managua, the Iranian also signed a "broad cooperation accord" with Mr. Ortega. Mr. Chávez openly funded the Sandinista's Presidential campaign last year, and he earlier supported Evo Morales in Bolivia. Venezuelan soldiers have reported that they are under orders to give Colombian rebels safe haven, and Mr. Chávez signed contracts last year to buy Russian MiGs and open a Kalishnakov factory at home.

Meanwhile, the Venezuelan is using his recent election victory to consolidate his grip on the economy. A week ago, he announced he would nationalize the country's electricity and telephone companies; he already controls the oil business. His goal here is to redistribute income but especially to shrink the private economy in order to reduce the space in which any political opposition can operate.

The Caracas Stock Exchange Index fell 16% last week, but that didn't phase Señor Chávez. He's moving to withdraw the license of a prominent independent television network, and he has asked Congress to grant him temporary executive power to rule by decree. "The world should know: Our revolution is not turning back," he said. "This is the path our boat is on: socialism. Country, socialism, or death."

The world should have known this a long time ago but too many people chose to ignore it. Mr. Chávez took office in 1999 on a promise to end corruption and injustice. By 2000, human rights groups warned of a deterioration in constitutional protections, and Mr. Chávez began importing Cuban security agents along with Cuban doctors and teachers to spread propaganda.

Each time Mr. Chávez has faced resistance, he has tightened the screws. Price and capital controls and property seizures became state policy. Employees of the state-owned oil company and its contractors were fired if they opposed the government; political opponents were jailed.

All the while, Mr. Chávez has had American enablers who excused his growing repression, or blamed it on a reaction to U.S. policy. Foremost among them has been Mr. Dodd, who has defended Mr. Chávez as "democratically elected" despite his clear trend toward authoritarianism. In 2004, the circumstances surrounding a recall referendum were so anti-democratic that the European Union refused to act as an observer. Jimmy Carter nonetheless blessed the outcome amid heavy irregularities, and the U.S. State Department endorsed the process. Other politicians, such as Mr. Delahunt, embraced and flattered Mr. Chávez for his PR stunt of offering cut-rate oil to poor Americans.

Perhaps it's time these Americans paid attention to the kind of "socialism" and "revolution" that their support is helping Mr. Chávez to build in Venezuela.

"The way to crush the bourgeoisie is to grind them between the millstones of taxation and inflation."

-- Vladimir Lenin

Mexican historian and author Enrique Krauze has written that he believes that the "last Marxist in history [will] die at a Latin American university." At a minimum, Mr. Krauze seems to have gotten the geography right.

Most of the rest of the world has stuffed communism into the dustbin of history but, as events over the past week remind, Latin America has not. Earlier this month, President Hugo Chávez officially took control of Venezuela's central bank and declared himself a communist. He then traveled to Ecuador to attend the swearing-in ceremony of his latest and perhaps most promising protégé, Rafael Correa, as that country's new president. Mr. Correa has lost no time emulating his mentor.

Mr. Correa, who was Ecuador's finance minister in 2005, was well known in the early stages of the presidential campaign last year as an anti-American, anti-market extremist with a view that "dollarization was the biggest economic error [Ecuador] has ever committed." But when he failed to win in the first round of voting in October, he was forced to adopt a more measured tone and backed off his pledge to end dollarization.

The trouble for Ecuadoreans, as we are now seeing, is that their new president's stripes have not changed. In his first week on the job, he has already demonstrated a profound understanding of Lenin's dictum that power over monetary matters is a revolutionary essential. To that end, he has begun an effort to destroy Ecuador's dollarization. From there, taxation and inflation will do much of his work for him.

At his inauguration last Monday Mr. Correa put on quite a show. Most extraordinary was his not-so-subtle admission that Mr. Chávez is going to be the power behind the Ecuadorean throne. Most Latin governments guard their independence as a matter of national pride. But Mr. Correa appeared quite happy to let the world know that he will be outsourcing Ecuadorean sovereignty to Venezuela.

Ecuador, the new president declared, is "leaving the night of neoliberalism behind" and the new "Bolivarian" government will pursue "21st-century socialism." He denounced competition and called for cooperation instead. He held up a sword that Mr. Chávez had given him as a gift and cried, "Look out, look out, Bolívar's sword is passing through Latin America," a reference to the Chávez agenda, which calls for South American integration under the thumb of the continent's largest energy producer. The Venezuelan president was perched behind the new president, eyes narrowed, enthusiastically applauding the performance. Iran's Mahmoud Ahmadinejad was also an honored guest, sitting next to Bolivian President Evo Morales.

Ecuador's political instability is legendary and Mr. Correa is the eighth president in 10 years. He will have to move quickly in his goal to consolidate power and if he is to avoid the fate of his predecessors, he will also have to move carefully.

Rewriting the constitution is so central to his agenda that on inauguration day he decreed a March 18 national referendum on the issue. The only problem is that Mr. Correa hasn't the power to call a constitutional referendum. Changes to the constitution fall under congress. Since Mr. Correa's party has no members in the 100-seat chamber and his coalition is shaky, it is not entirely clear that he will be able to push through the constitutional changes he seeks. His socialist revolution via a constitutional coup could be delayed.

Still, that doesn't leave the aspiring authoritarian without options. He has Lenin's millstones to fall back on, if only he can resurrect a local currency. This explains the assault on dollarization now under way.

The adoption of the greenback as Ecuador's currency seven years ago has been extremely popular among Ecuadoreans of all classes. A long history of repeated bouts of hyperinflation, which destroyed both wages and savings, has finally come to an end and been replaced by a new sense of stability. Mr. Correa knows full well that he cannot strip Ecuadoreans of this one economic gain without facing the kind of rebellion that brought down previous governments. Yet the control he yearns for will not be his as long as the dollar reigns.

To reverse dollarization and introduce a fiat currency, Mr. Correa will have to undermine the dollar economy. One step in that process is stifling commerce with the U.S., his country's largest trading partner. He has already pledged that under his guidance Ecuador will move away from trade liberalization with the gringos and throw its lot in with Mr. Chávez's Bolivarian Alternative for America trading block.

Protectionism will help weaken the dollar economy but it may not be enough to provoke a crisis. A forced restructuring of the country's $10.3 billion in external debt will provide further assistance by damaging the country's creditworthiness and discouraging new investment, particularly because it is well known that Ecuador's debt service as a percentage of gross domestic product is lower than Colombia's or Brazil's. Creditors understand that paying what is owed is a matter of willingness. Nevertheless, Mr. Correa's finance minister, Ricardo Patino, last week proposed a haircut of 60% on the country's debt and invited a team of Argentine officials -- otherwise known as the world's most experienced deadbeats -- to Quito this week to act as advisers.

It will be claimed that the "savings" on debt service will be used to help the poor. This will boost Mr. Correa's populist appeal but politicians never have enough revenue to meet their goals. Low growth rates and disappointing oil prices will exacerbate revenue shortfalls. In a fiscal crisis it is easy to imagine a government like Mr. Correa's issuing script or a new currency in parallel to the dollar.

The new president seems to be prepared for just such an outcome. In the past he has called for a regional currency and he has now announced that he will end central-bank autonomy. Once foreign investment and trade dry up and the bottomless pit of corruption and social spending drains public coffers, dollarization will be the scapegoat. Mr. Correa can then begin to print his own notes and make Lenin proud.

U.S. President George W. Bush is beginning a weeklong tour of Latin America, a region of countries that have chosen either political populism or political moderation.

Analysis

U.S. President George W. Bush is about to begin a week of travel to Latin America. He has chosen to visit five countries that are on good terms with the United States in a region divided between countries that have chosen political populism and those that have chosen political moderation.

Though Latin America often is seen as being divided between left and right -- with the charismatic Venezuelan President Hugo Chavez leading the left -- the region can more accurately be divided between populist and moderate governments.

While all countries in the region claim to want greater regional integration and help for the poor, the populists (Venezuela, Ecuador, Bolivia and, to some extent, Argentina) aim to provide for the general population by appropriating their natural resource wealth, while the moderates (Brazil, Uruguay, Peru, Chile and, to some extent, Mexico) aim to thrive via commerce. Of these two groups, only Venezuela and Brazil aspire to shape the region as a whole.

Chavez is the populist movement's leading figure, though he neither created nor fully controls it. The rebirth of populism, which ideologically is tied to the region's socialist roots, was inevitable following widespread disillusionment with the neoliberal economic adjustments the International Monetary Fund (IMF) imposed during the 1990s in order to create macroeconomic stability. Although the measures managed to bring serious inflationary pressures under control, they did not resolve the region's notorious inequalities, and considerable resentment grew.

This led each country to one of two conclusions. The first was that the policies pursued by the IMF, the so-called "Washington Consensus," benefited multinational corporations, Washington and wealthy Latin American elites who served the first two -- meaning an entirely new approach was needed. This conclusion was most popular in places with a great deal of oil and mining wealth from which the public did not directly benefit -- Latin America's populist countries.

The second conclusion maintained that a painful adjustment period was necessary, and could be brought about by expanded education and other social programs. Meanwhile, this view held, the rule of law could be strengthened to allow commerce to continue to expand, and the lower classes would be offered the means to improve their lot. This conclusion was most popular in places where the business class was successfully expanding, moderate countries that today essentially are continuing policies put in place during the 1990s.

Although the populist/moderate divide is not as stark as some have made it out to be, it is not negligible either. The mixture of populism and socialism has potential implications for the political structures of the nations that have embraced populism as they pursue constitutional reforms that will include redistricting and the creation of local citizen councils with expanded powers. In the name of promoting community rights, these nations will further undermine the operational stability of companies operating there.

Chavez has taken the first conclusion to its extreme, making it clear that U.S. influence and private companies are not welcome in Venezuela and justifying the consolidation of authoritarian powers by the popular backing won through oil-funded social programs. While Bolivian President Evo Morales and Ecuadorian President Rafael Correa have taken similar steps, they are not interested in completely imitating or obeying Chavez, nor do they really share his regional ambitions. Instead, they are interested in their respective visions for the welfare of their own countries, though they agree with some of Chavez's measures and appreciate his aid.

Chavez has thrown a great deal of money around Latin America (though some of these financial promises could go unfulfilled as Venezuela runs a budget deficit), while the United States has been distracted in Iraq and elsewhere and the IMF has basically finished up its lending in the region and gone home.

Meanwhile, Venezuela and Brazil have competing visions for the region. Venezuela's is more aggressive, while Brazil's is more passive. However, the countries differ in more than just approach -- the cores of their visions are incompatible. As long as Brazil enjoys secure access to Bolivian natural gas, it need not be too concerned about Chavez's antics in the region. However, Brazil also would like to see the region conduct trade negotiations with other powers as a bloc rather than individually, increasing its collective bargaining power and giving Brazil a natural leadership role. Venezuela's entry into Mercosur destroyed the regional organization's ability to serve as such a trade bloc. Brazil now finds itself stuck, unwilling to kick Venezuela out, withdraw itself or bypass Mercosur and negotiate unilaterally.

To Brazil's south, Uruguay and Argentina are engaged in an ongoing border conflict over pulp mills, and neither Buenos Aires nor Montevideo appears eager to resolve the dispute.

To Brazil's northwest, Colombia is surrounded by Ecuador and Venezuela -- both of which are populists. Border tensions in the area have been increasing, while there are rumors of infiltrations by Bolivarian propagandists from Venezuela into Colombia in an effort to woo towns away from Colombian President Alvaro Uribe Velez. As far as hotspots go, Colombia's border area is the one to watch, especially since Colombia is the flashpoint between U.S. influence in the region and its opponents.

Bush's itinerary includes stops in Mexico, Guatemala, Colombia, Brazil and Uruguay. Mexico finds itself in the interesting position of being economically dependent on its oil exports but attempting to go the moderate route. There, Bush will affirm his positive relationship with President Felipe Calderon and try to smooth over border/immigrant policy tensions. Meanwhile, Guatemala is stuck in the geopolitically irrelevant region that is Central America; the main reason for Bush's Central American stop is to acknowledge Guatemala's participation in the U.S.-led coalition in Iraq. In Colombia, Bush will show his support for the president, who has been beleaguered by a scandal tying members of his government to right-wing paramilitaries.

But, ultimately, it is Brazil and its junior neighbor, Uruguay, that potentially have the power to jointly transform or dismantle Mercosur, eventually reopening dialogue with Washington on a Free Trade Area for the Americas -- although that is a long way off. During his stops there, Bush will promote an ethanol partnership with Brazil and encourage Uruguay to continue to work toward a free trade agreement with the U.S.

For now, most countries in Latin America have settled either on populism or moderation. On this trip, Bush is focusing on the moderates and expanding their U.S. aid -- likely signaling that Washington intends to reward countries that avoid populism. However, the moderates have not chosen their course in order to please the United States, and it will take a much more concerted effort than one trip for Washington to have much of an impact on the region's dynamic.

ECUADOR: Ecuadorian police surrounded the country's Congress building to prevent 57 opposition congressmen from entering. The Supreme Court issued a ruling March 7 that removed the congressmen from office after they voted to replace Supreme Electoral Tribunal President Jorge Acosta for backing President Rafael Correa's plan to hold a referendum on rewriting the constitution.

ARGENTINA: Bolivian President Evo Morales will attend a public event March 9 organized by the Argentine organization Mothers of Plaza de Mayo in Buenos Aires, in which Venezuelan President Hugo Chavez will speak, local media reported. Morales also will meet with Argentine President Nestor Kirchner to sign bilateral energy agreements, but will not attend a meeting in which Chavez is set to critique U.S. President George W. Bush's trip to Latin America.

VENEZUELA: The first South American energy summit has begun on the Venezuelan island of Margarita. At the summit, leaders from Chile, Ecuador, Brazil, Colombia, Paraguay, Peru, Bolivia and Suriname will discuss energy cooperation, including regional pipeline projects. Ethanol also is expected to be on the agenda. Bolivian President Evo Morales likely will hold separate bilateral meetings with the presidents of Chile, Brazil and Ecuador following the summit.

NICARAGUA: Nicaraguan police completely disassembled the structure of Mexican drug cartel Sinaloa in Nicaragua in a joint operation with the army called Operation Fenix, Nicaraguan police spokesman Cesar Cuadra said. Cuadra added that police have detained 24 Sinaloa members and obstructed activities led by Sinaloa chief of aerial operations Jose Juvenal Mendoza Gonzales and main chief of operations in Nicaragua Guillermo "El Cochi." Police also raided the house of Sinaloa chief of maritime operations in Nicaragua Carlos Cisnado Pasos, who remains at large, along with Guillermo and Gonzales.

I am fascinated by the similarities between Russia and Latin America. The latest wave of repression against critics of President Vladimir Putin and the victory obtained by Ecuadorian President Rafael Correa in last Sunday's referendum, which provides a green light toward setting up a constituent assembly that will give him authoritarian powers, remind us that despotic populism is alive and kicking.

Last weekend's detentions in Moscow and St. Petersburg of members of the "Other Russia," an opposition organization that includes former chess champion Garry Kasparov as one of its leaders, are a reminder that Russia is a ruthless autocracy.

With the exception of Venezuela, the authoritarian institutions operating under democratically elected governments in Latin America are not as bad as Russia's. Power is more decentralized in Latin America, where governments have not been able or willing to wrest back economic influence from the private interests that surfaced during the market reforms of the 1990s. Mexico was also dominated by a party-state for much of the 20th century and underwent a process of reform in the 1990s. Despite its many flaws, reform improved the political and economic environment. In Russia, liberal democracy never quite surfaced. Mr. Putin reacted against the oligarchy of the 1990s by establishing his own oligarchy. By contrast, although there was much crony capitalism, Mexico's system is freer.

With the return of populism to various parts of Latin America, a number of countries are headed in the direction of Russia. The formula usually combines a democratic origin, the dismantling of republican institutions from within and reliance on natural resources that are in high demand in the international markets. Last Sunday, Ecuadorians voted in large numbers to essentially rewrite the constitution. In this, Mr. Correa, who wants to replace democracy with an authoritarian regime, is following the example of his friend Hugo Chavez and of Bolivia's Evo Morales. And if Mexico's and Peru's current governments do not deliver economic improvement, we could easily see populists taking over the reins of power there too.

Russia and Latin America are the products of histories dominated by the absence of civil rights and property rights. In Russia, the absence of a liberal tradition doomed the transition to liberal democracy in the 1990s. In Latin America, the republics of the 19th century preserved the oligarchic structure of the colony. In the 20th century, they mostly experimented with populist democracy and military dictatorship.

Recent developments prove that the populist republic is not a thing of the past in Latin America. And the populist republic -- the combination of democratic appearances and autocratic controls, sustained by the sale of oil and minerals -- has much in common with Mr. Putin's Russia.

Losing Latin AmericaMay 4, 2007; Page A14Wall Street JournalA popular theme among Democrats running for President is their pledge to make America better liked around the world. Hillary Clinton says she'll even dispatch her husband as a kind of ambassador to the world. Well, he might start in Latin America, where our allies are getting stiffed by Democrats in Congress on trade and security.

We're referring in particular to Colombian President Álvaro Uribe, who has been in Washington this week, making his case for the U.S.-Colombia free-trade agreement and for continued U.S. help against terrorism. Colombia, Peru and Panama have all negotiated trade accords with the U.S. that, pending Congressional approval, would raise living standards and expand American influence.

A defeat for any of the three would do great harm to the Andean region, where democrats are battling Hugo Chávez's neo-socialist populism. Mr. Uribe, Peruvian President Álan Garcia and Panamanian President Martin Torrijos have all bet their futures on opening their economies to the U.S. If they're rebuffed, the local disciples of Mr. Chávez will say they were right not to trust the capitalist Yankees. The consequences won't look good on Nancy Pelosi's resume.

On economic grounds alone, the U.S. has everything to gain by approving these trade deals. Most Peruvian and Colombian exports already have duty-free access to the U.S. market through the Andean Trade Preferences Act. But U.S. manufacturing and farm exports heading south still face high tariff and non-tariff barriers. The regional financial center of Panama is especially attractive for U.S. services but is likewise a protected market.

The larger goal is spurring development and improving the investment climate in all three countries. While Colombia and Peru have duty-free access to U.S. markets, that privilege must be renewed every few years. The FTAs end this uncertainty. Even if Latin producers lose some protection, new access to imports means they can use help from abroad to innovate and grow more competitive. This is how Chile became an export powerhouse and reduced poverty. Maybe that's why Chile's Socialist President Michelle Bachelet has endorsed the deals.

None of this matters to some Democrats, whose loyalty to the AFL-CIO trumps their concern for the poor. Having won assurances that our Latin trading partners would enforce their labor and environmental laws at home, such Democrats as Michigan's Sander Levin are now asking for more. They're threatening to block the Latin FTAs unless the U.S. accepts language that would force U.S. companies to adhere to International Labor Organization "core principles." These "principles" have never passed Congress, in part because they'd put "right-to-work" states in legal jeopardy. Republicans won't support a trade pact with such a provision, which suggests that Mr. Levin intends it as a poison pill.

All of this is taking place while Venezuela's Mr. Chávez is working to reduce American influence in the Western Hemisphere. He's doing energy deals with China while confiscating U.S. oil assets. And he's pressing to supplant the U.S. goal of hemispheric free trade with a high-tariff South American customs union that he would run. Bolivia and Ecuador have already been captured by versions of chavismo, though Peru and Colombia have so far escaped thanks to their political leadership.

Colombia is especially vulnerable, as Mr. Chávez provides aid and comfort to that country's narco-trafficking guerrillas. This is why Mr. Uribe is also asking for continued U.S. assistance to fight organized crime. The State Department has certified that Colombia has held up its commitment to human rights under this "Plan Colombia" agreement.

But now that they control Congress again, Democrats are putting this policy in doubt. Mr. Levin says the Colombia FTA should be blocked on human rights grounds, claiming that Mr. Uribe's impressive record of reducing murder, kidnapping and terrorism isn't good enough. Vermont Senator Pat Leahy has put a hold on $55 million in new Plan Colombia funding because of false human rights charges coming from Mr. Uribe's political enemies in Bogotá. Mr. Leahy's grandstanding is all the more embarrassing because U.S. demand for cocaine is the largest source of financing for the criminal networks that have killed so many innocent Colombians.

If Democrats want to make more enemies in Latin America, this is the way to do it. The twice-elected Mr. Uribe is the most far-sighted leader Colombia has had in decades, and his FTA is an attempt to align his country's future firmly with the hemisphere's free-market democracies. Peru, Panama and Colombia are saying they want to be America's political and economic partners. Do Democrats in Congress want to drive them into the arms of Mr. Chávez?

BOLIVIA: A group of university students with torches, sticks, rocks and dynamite demonstrated in Sucre, Bolivia, late June 19. Police used tear gas to prevent the students from reaching the Constitutional Assembly. The students were protesting a proposed article in the assembly that would grant government control over universities -- a measure that ruling Movement Toward Socialism party already has said it will no longer support.

Henry Posner III is an American entrepreneur who has revitalized rail systems in Peru, Argentina, Mozambique and Malawi. He also has been working since 1996 to revive rail service in Guatemala. But now Mr. Posner's Pittsburgh-based company, Railroad Development Corp., is suspending operations in the Central American country, charging that the government has violated RDC's 50-year concession contract and refused to enforce the company's property rights.

"Because of the government's action and the lack of the rule of law in Guatemala, we have no other alternative," Mr. Posner wrote in a letter to customers, investors and employees on July 6.

Americas columnist Mary Anastasia O'Grady discusses an American's fraught attempt to develop the country's railroads. For Guatemala, the matter is more serious than a simple dispute about a state concession. Mr. Posner, who is chairman of RDC, is taking his beef to international arbitration under the Central America Free Trade Agreement (Cafta) and asking for $65 million in lost revenues and investments. In its complaint to the Cafta panel, the company also charges that there is method to the government's maddening mistreatment of the company: It wants to "redistribute to certain Guatemalan private-sector companies the benefits of the right-of-way, without compensation."

If the American businessman prevails, the case will reinforce the country's traditional image as a banana republic uninterested in equality under the law and ready to trample property rights whenever it is politically expedient. What else are investors to conclude if it turns out that President Oscar Berger's "right-of-center" government, which pays lip service to property rights, has unilaterally abrogated a lawful contract? This would be a blow to all Guatemalans, who need investment in their country if they are to benefit from and compete within Cafta.

Transportation infrastructure is crucial to economic development in any country and Guatemala is no exception. In the early part of the 20th century the country had a national railway that was largely the product of investment by an affiliate of United Fruit. It was nationalized in the 1960s and over three decades run into the ground. By 1996, it was completely defunct.

That left the country's distribution system entirely reliant on a costly, polluting highway system subject to congestion, accidents and rampant hijacking. In 1997 Guatemala held a World Bank-style, sealed-bid tender process for the concession that was to restart the dead railroad. RDC won. In December 1999, Ferrovías Guatemala's first train chugged out of the Atlantic coastal city of Puerto Barrios on its maiden journey to the capital. Mr. Posner says that the concession included the right-of- way on the old rail line that runs out to the Pacific at Puerto Quetzal, north to Mexico and south to El Salvador as well, and that RDC promised "best efforts" to get the Pacific side going.

In 2005 the railroad shipped some 150,000 tons of traffic -- mostly steel, as well as containers -- on the Atlantic route but it was having a lot of trouble with the government. Mr. Posner says the terms of the concession included a government pledge to remove squatters from the railroad right-of-way and to redirect half of the lease payments from railroad-owned assets toward track maintenance and improvements. The squatters were never resettled elsewhere -- photographs support this claim -- and, he says, the lease revenue "disappeared and we had to replace it."

In 2005, RDC tried to get Guatemala to go to binding arbitration as provided for under the concession. But the government refused, arguing that it was not bound to do so. The government also says that the company has not kept up its side of the agreement by investing in the country. While Mr. Posner says his company has invested $15 million in the railroad, President Berger has said that the concessionaires "have not invested one cent." In August 2006, the government declared the concession "harmful" to the interests of Guatemala and moved to confiscate the railroad's rolling stock and equipment. The company says this inflicted further damage on it as investor confidence plummeted and its ability to access credit markets was strained.

Still, Mr. Posner says the railroad could have continued to operate were it not for Guatemala's indifference toward another of its property rights. The company's business plan had included charging for use of the right-of-way for electricity distribution, pipelines, fiber optics and the like. This was stipulated in the concession and would have subsidized rail operations. But while some local companies paid for that use, others began free riding along the right-of-way. When RDC appealed through the Guatemalan legal system for protection in the matter, the courts sided with the commercial squatters. This signaled the market that what is essentially theft would be tolerated, and RDC lost an important source of revenue.

The World Bank hasn't been much help either. It declared Ferrovías Guatemala's property a "category A environmental problem" because of the squatters and refused to lend to it. Mr. Posner says the bank's position was that he had to prove to the satisfaction of the squatters that RDC has done no harm. "That's like handing someone a loaded gun while you open your wallet and negotiating from there," Mr. Posner says. No wonder no one takes the Bank seriously. It lends to Mexican billionaire Carlos Slim but when it comes to defending property rights it runs for cover.

Most troubling in all of this is the charge in RDC's Cafta complaint that in driving the company out of the country, the government seeks to satisfy special interests. There is talk that a cross-country rail system designed to compete with the Panama Canal would be a big money maker as Asia booms. And while Mr. Posner dismisses that idea, he notes that the rail right-of-way is immensely valuable for more than simply hauling freight. Whatever the reason for breaking the concession, it's hard to see how it won't harm Guatemala's image with foreign investors at a time when the country ought to be courting them.

When Argentine customs officials caught a Venezuelan businessman trying to smuggle almost $800,000 in cash into the country last month, they parted him from his loot but allowed him to leave the country. He flew to Uruguay and then to Florida where, as someone who also holds an American passport, he has a home.

The mystery of where the money came from and where it was going has not been solved. But thanks to investigative reporting by the Argentine daily La Nación, we now know that there was good reason for Guido Alejandro Antonini Wilson to think he could just walk off that plane with a bag of money. As it turns out, the Argentine government of President Nestór Kirchner has a policy of allowing Venezuelans tied to the government in Caracas to come and go freely at Buenos Aires' Aeroparque airport, with no scrutiny of their baggage whatsoever.

This revelation has raised serious questions about Argentine sovereignty and about the relationship Mr. Kirchner has established with Venezuelan President Hugo Chávez. More to the point, Argentines now want to know whether unchecked Venezuelan traffic through the country is what's behind the acceleration of Mr. Chávez's Bolivarian Revolution in Argentina, as it was in Bolivia. They also want to know if the money was destined for the political campaign of Mr. Kirchner's wife, Cristina Fernández Kirchner, who is the Peronist candidate in next month's presidential elections.

The Argentine government appeared happy to get rid of Mr. Antonini in the early morning hours of Aug. 4 when the money was discovered. With him out of the country, it apparently believed the whole thing could be easily swept under the rug. But then a local cable TV station reported the incident. Soon the wider Argentine media picked up the story and the public learned that the Venezuelan bagman had arrived on a charter flight from Caracas with two Argentine government officials and three executives of the Venezuelan state-owned oil company, PdVSA. This sparked a political firestorm for the Kirchners. Now Argentina wants Washington to extradite Mr. Antonini. That process could take up to a year.

In the meantime, the presidential race is heating up and the first couple is claiming to know nothing about what Mr. Antonini was up to. For a while that seemed at least plausible. But as details have emerged about the circumstances at Aeroparque, the government's umbrage at the suggestion that it could have been complicit in the matter is looking downright theatrical.

Mr. Chávez's influence has been rising in Argentina for some years now, in part because Mr. Kirchner has much in common ideologically with the Venezuelan. Like Mr. Chávez, Mr. Kirchner has surrounded himself with former left-wing terrorists and their sympathizers and has made anti-Americanism a central theme in his policy agenda. Mr. Kirchner is also a practical man and after Argentina was branded a deadbeat for its 2001 debt moratorium, the Chávez offer to play international banker and buy up government bonds was an offer he couldn't refuse. Now the Antonini affair has exposed another facet of the Chávez-Kirchner alliance: open access to Argentina for Chávez foot soldiers.

La Nación reported on Aug. 18 that PdVSA flights receive "preferential treatment" when they arrive in Argentina. The planes drop their passengers in the military zone at Aeroparque where they clear Customs and Immigration. But according to the paper, that zone has one special feature that makes it relevant to the suitcase scandal: "there are no scanners to examine baggage."

The plane Mr. Antonini was on, which was hired by the Argentine state-owned energy company Enarsa, seems to have parked at the wrong terminal. That's why he got nabbed. La Nación also reports that sources familiar with airport activity say that in the past few months at least eight PdVSA flights have landed at the military zone in Aeroparque and that at least one PdVSA plane lands there every month. Given what was found on Mr. Antonini it is reasonable to ponder what these flights might be carrying. As La Nación has pointed out, one of the organizers of the anti-American rally in Buenos Aires when George W. Bush went to Uruguay in March admitted that the event was paid for by Venezuela. But how the money got to Argentina is still not known.

Quite apart from money, there is also the question of revolutionary personnel coming and going. Citgo, the Venezuelan gasoline company that operates in the U.S. but has no business in Argentina or Bolivia, has a U.S. registered plane that has landed more than once in Aeroparque. The same plane, in July 2006, was used for an official visit to a presidential summit in Cordoba, Argentina. "But," according to La Nación, "in that moment, it was operating as the transportation for the Cuban delegation." In fact, the paper says "these planes are used for both government and business purposes and it is difficult to know the nationality of the passengers because they fly Venezuelans, Cubans and Bolivians."

The highest ranking Argentine official on Mr. Antonini's flight was Claudio Uberti, the director of highway concessions. La Nación says that Mr. Uberti flew out of Argentina 27 times in the past 12 months and six of those trips were to Venezuela. The paper reports that he went more frequently than that to Venezuela but sometimes flew from Bolivia. When he arrived home on charter flights, he repeatedly used the military zone at Aeroparque. "If that had happened this time, Mr. Antonini wouldn't be famous," writes La Nación reporter Daniel Gallo. For his part, Mr. Antonini reportedly entered Argentina 12 times in the past year.

According to Mr. Gallo, "the PdVSA flights are peculiar in that their passengers, supposedly high-ranking Venezuelan representatives, do not appear on the registers or meeting agendas of Argentine officials, as they should by law. Neither [Planning] Minister Julio De Vido nor Mr. Uberti report meetings with PdVSA that would have required the trips by such visitors."

It may take a good long time to figure out just where Mr. Antonini was going with his stash. Speculation ranges from laundering money to paying a bribe to funding political activity. But in a sense it doesn't really matter. What has been revealed since Aug. 4 is that Mr. Kirchner has sacrificed Argentine national security in order to satisfy Mr. Chávez. That can't be good for the stability of the Southern Cone.

Economist Joseph Schumpeter (1883-1950) may be best known for his innovative work showing the link between entrepreneurial discovery and economic progress.

But as Carl Schramm, president of the Kauffman Foundation of Entrepreneurship has pointed out, Schumpeter's insights about risk-takers didn't make him an optimist.

In a speech last year to European finance ministers in Vienna, Mr. Schramm explained Schumpeter's fears: He "worried that entrepreneurial capitalism would not flourish because the bureaucracies of modern government and big corporations would dampen innovation -- the process of 'creative destruction' would be too ungovernable for a modern, Keynesian-regulated economy to tolerate." As a result, Mr. Schramm said, Schumpeter thought that "the importance of entrepreneurs would fade over time as capitalism sought predictability from governments who would plan economic activity as well as order social benefits."

Mr. Schramm's comments caught my attention because they so accurately describe Latin America. There the entrepreneur has been all but run out of town by the bureaucracies that Schumpeter feared. Growth has suffered accordingly.

The World Bank's annual "Doing Business" survey, released last week, demonstrates the point. The 2008 survey, which evaluates the regulatory climate for entrepreneurs in 178 countries, finds that Latin America and the Caribbean was the slowest reforming region this year and that it "is falling further behind other regions in the pace" of reform.

The average time it takes to start a business -- one of 10 factors measured -- in Latin America and the Caribbean is 68 days, longer than anywhere else. Compare that with the Organization for Economic Cooperation and Development, where business start-ups take less than 15 days. Other common problems in the region are weak minority-shareholder rights, slow legal regimes and punishing tax systems.

Yet as bad as the regional averages are, entrepreneurs in Venezuela probably view them with envy. When it comes to the ease of doing business Venezuela now ranks six places from the bottom world-wide, between Eritrea and Chad. It also finishes dead last among the region's 31 countries -- and that includes Haiti. In the category of "employing workers" Venezuela ties with Bolivia at No. 177. The authors note that it is "not possible" to fire a Venezuelan employee. "Starting a business" takes 141 days and in ease of "paying taxes" it ranks No. 174.

Keeping Venezuela company in the cellar are Ecuador, which finishes 27th in the region, and Bolivia, which comes in 28th. Only Suriname, Haiti and Mr. Chávez's oil paradise have more hostile business climates.

To understand how Argentina went from being one of the world's top-performing economies during Schumpeter's lifetime to the basket case it is today, this report is instructive. The resurgence of Peronist economics helped it slide 16 places lower than its 2006 ranking. Not only has it failed to carry out any meaningful reforms but in the past year it complicated the insolvency process. And its tax system remains punitive: A company that pays all its taxes coughs up the equivalent of 113% of its profit. Argentina finishes 22nd in the region but ahead of Costa Rica, which comes in 24th. Guatemala, El Salvador and Nicaragua are all better places to be an entrepreneur than Costa Rica.

Brazil earned about the same ranking as last year. It made improvements to its legal regime but lost ground to more aggressive reformers in the category of "trading across borders." It also takes last place world-wide for the time it takes to comply with the tax code (2,600 hours) and ranks 137th in the "paying taxes" category.

Sluggish reform in the region has led some analysts to conclude that democracies in the developing world cannot overcome the obstacles to modernization presented by the political economy. Yet there are regional successes that prove that where there is political will, there is a way.

Take Mexico. In last year's report it jumped almost 20 places world-wide thanks to a reform-minded treasury ministry under former President Vicente Fox, which lowered tax rates and made property registration easier. It now has the fifth-most pro-business climate in the region. If the government of Felipe Calderón keeps its reform promises, more improvements should be on the way, though its price controls on bread and tortillas are not a good sign.

This year's superstar is Colombia. It is among the top 10 reformers world-wide and ranks 12th in the region. It made enormous progress in "trading across borders" by reducing the time goods spend in terminals, extending port operating hours and making more selective customs inspections. It also strengthened investor protections, adopted an electronic tax filing system and progressively lowered the corporate tax rate to 33% in 2008 from 35% in 2006. Much more work is needed but the moral of the story is that with leadership, such as that which President Álvaro Uribe has provided, reform is possible.

But the opposite is also true. Chile has fallen nine places since its No. 24 ranking in the 2006 report, suggesting that the center-left coalition running the country is not attuned to the importance of entrepreneurial freedom.

The most important lesson for Latin America from the World Bank's report is that its competitors around the world are working to unleash entrepreneurial spirits, and doing nothing is not an option. As Mr. Schramm told his Vienna audience, "Schumpeter saw what a century of evidence would prove: Socialism has not sustained economic growth." Now, if only more Latin American policy makers would catch on.

Royal ReprimandNovember 12, 2007; Page A16Spain's King Juan Carlos is revered for his decisive role in restoring democracy in his country after the death of General Francisco Franco. Over the past quarter century, the Spanish royal has been a voice for civility and reconciliation, both in his home country and throughout the Spanish-speaking world.

So it was a rebuke heard 'round the world this weekend when he told Venezuelan President Hugo Chávez, "why don't you shut up," at the Ibero-American summit in Santiago, Chile. Mr. Chávez had gone on a rant against former Spanish Prime Minister José Maria Aznar, calling him a "fascist" and stating that "fascists are not human. A snake is more human."

Venezuelans have endured this sort of rhetoric for nine years from their strongman president, and Mr. Chavez has shown the same bullying style without rebuke at the United Nations. But the summiteers apparently had enough. Spanish Prime Minister José Luis Zapatero -- who has enjoyed a cozy relationship with the Venezuelan government and is no ally of Mr. Aznar -- demanded that Mr. Chávez respect the participants at the table. He reminded the Venezuelan that Mr. Aznar had been elected by the Spanish people. As he later told journalists, Mr. Chávez's words were "inappropriate and unacceptable."

Mr. Chávez would have none of it and, although his microphone was turned off, tried to talk over the Spanish head of state. That's when King Juan Carlos leaned forward, looked directly at Mr. Chávez, and told him to close down his act. Mr. Zapatero finished his dress down of Mr. Chávez and the room erupted in applause. The king rose and walked out shortly thereafter, having made his point in defense of civil discourse.

Just before Cristina Fernandez's victory in Argentina's recent presidential elections, author Marcos Aguinis told me in Buenos Aires, "Some people think she might be a bit better than her husband because she likes haute couture and meeting the rich and famous -- but who knows." He was referring to the hope that her well-known penchant for all things glamorous will keep the president-elect, who is also a former senator, from being an anti-American and globaphobic populist like her husband, outgoing president Nestor Kirchner.

Glamour, however, will not prevent the crisis that will hit Argentina if she does not reverse her husband's policies. In classic Peronista form, the Kirchner couple has engaged in political patronage, manipulated the country's institutions, and encouraged radical left- wing groups to take center stage while presiding over a serendipitous economic boom.

What the Kirchners think is their "new model" for Latin America is essentially the short-term reward resulting from the massive devaluation of the currency a year and a half before Nestor Kirchner took office, the skyrocketing prices of the country's commodities, and the president's decision to pay back barely one-third of the face value of $140 billion worth of government debt paper.

The prices of Argentina's cereals, fuels and minerals have experienced a double-digit rise this year, continuing a trend that, together with cheap tourism, has helped generate GDP growth rates of between 7% and 9% in the last four years. As the world's fifth largest exporter of foodstuffs, Argentina is having a field day with the voracious demand coming from China and other nations. At times, Argentineans seem to be reliving their golden 19th century days when their abundant meat and cereal exports attracted millions of Europeans to Buenos Aires in search of the cornucopia.

But these blessings conceal two fundamental problems. The first is a dysfunctional institutional environment. It did not start with the current administration but the presidential couple has made it worse. The second problem is a byproduct of the first: An economy riddled with political bottlenecks that are consuming the capital accumulated in the previous decade, and fueling inflation.

The Kirchner presidency has systematically undermined checks and balances. Thanks to a law that was passed with the support of his wife in the Senate, Mr. Kirchner changed the structure of the Magistrate Council and placed the judiciary under Peronista control. He also brought into the fold the crushing political machinery of the Buenos Aires province, which accounts for almost 40% of the national vote and used to be in the hands of former president Eduardo Duhalde, a Peronista rival. That was achieved by having Cristina Fernandez run for the Senate seat of the Buenos Aires province as opposed to the seat representing Santa Cruz.

Mr. Kirchner has also used his majority in Congress -- now expanded by his wife's victory in the presidential elections -- to obtain "emergency powers" that have given him personal discretion over the entire budget. In traditional corporatist fashion, Cristina is now speaking of a "social pact" by which the government will negotiate laws and policies with groups supposedly representing civil society but in reality working to keep the Peronista clientele happy.

Then there is the economy. On the surface, things couldn't be better. After a crisis that turned a middle-class country into a Third World nation, Argentina has seen about 11 million people pull out of poverty -- i.e. go back to their living conditions of the 1990s. By raising public spending by 50% annually and wages by 40% in the last four years, keeping interest rates low, controlling half the prices that make up the consumer price index, and nationalizing or creating state enterprises in eight major sectors of the economy, the government has achieved a populist artifice. As the results of the presidential elections show, Argentineans are not buying this illusion of prosperity in the main urban centers (the nation's capital, Cordoba, Santa Fe, and others), but the rest of the nation is.

The real story is that investment is very low and inflation very high -- and the social demands of a population that has been promised a paradise are infinite. Although Mr. Kirchner has tried to conceal inflation figures by replacing the head of the national statistics institute, no one I talked to in Argentina thinks inflation is below 20%. The energy crisis, a consequence of Mr. Kirchner's decision to continue to freeze prices at one-third of market value and therefore discourage investment at a time of rising demand due to the economic bounce, is causing havoc. Foreign direct investment has dropped by about 30% in the last three years, whereas in Chile, Argentina's next- door neighbor, it has risen by almost 50%.

This amounts to the squandering of a marvelous opportunity for a country whose past prosperity, relatively educated population and political gravitas in the region should have granted it a leading role in Latin America in this new millennium. The fact that a sophisticated woman will be the next president should have been a reason to rejoice in a part of the world where politics has been a notoriously "machista" enterprise. But it will take a miracle, i.e. an act of political treason by Cristina against her husband's legacy, to avoid the iceberg for which Argentina's Titanic is headed.

Jorge Luis Borges, Argentina's late poet, used to say, "Peronismo is neither good nor bad -- it is incorrigible." Will Cristina's love of the good life serve as an antidote to Peron-style populist socialism? Although the chances are extremely slim -- she has announced that nine of her husband's ministers will stay on to serve in her cabinet -- let us pray that Cristina proves Borges wrong.

Mr. Vargas Llosa is the director of the Center on Global Prosperity at the Independent Institute and the editor of the upcoming book "Lessons From the Poor," to be published in March by the Independent Institute.WSJ

Argentina isn't conscientious about paying its debts, but maybe that's about to change under freshly inaugurated President Cristina Kirchner. Two news items that broke last week suggest that her government may be running a hefty tab with President Hugo Chávez in Venezuela and is earnestly trying to repay him.

The U.S. Justice Department alleged on Wednesday that Mrs. Kirchner's recent election campaign was the destination for $800,000 in cash shipped south in a suitcase from Mr. Chávez in August. If true, it would confirm what many Argentines have long suspected: that Argentina, under former President Nestor Kirchner and now his wife, has been leased out to the Venezuelan strongman in much the same way that Bolivia and Nicaragua have come under Mr. Chavez's influence.

This is grim not only for Argentine democracy. If members of the Organization of American States are indeed on Mr. Chávez's payroll, it would explain why the Washington-based multilateral organization, charged with defending democracy, has been so timid with the anti-democratic Venezuelan president.

It also raises questions about whether Mrs. Kirchner was acting in good faith last week when she met with Mr. Chávez's sworn enemy in South America, Colombian President Álvaro Uribe, to discuss the plight of French-Colombian hostage Ingrid Betancourt and 44 others held by the Revolutionary Armed Forces of Colombia (FARC).

Mrs. Kirchner went on the offensive last week, charging that the U.S. sting operation was "garbage." But the feds may have the goods. Recall that the bagman carrying the $800,000 returned to his home in Florida after being released by the Argentine authorities. The U.S. attorney in Miami says that three Venezuelans and an Uruguayan acted as foreign agents when they traveled to the U.S. to try to silence him "in an effort to keep the lid on a burgeoning international scandal."

Given the nonchalance with which the smuggler approached his task, it is not hard to fathom that the transaction was considered routine by Venezuela and that he was only an unlucky one who got caught. The Argentine daily La Nación revealed last summer that Venezuelan aircraft and personnel regularly land and bypass customs inspections at Jorge Newberry Airport in Buenos Aires.

Mrs. Kirchner would owe Mr. Chávez a lot if he did indeed underwrite her campaign. So perhaps that explains the pro-Chávez attitude she took last Tuesday toward Colombia's hostage issue when she met with President Uribe in Buenos Aires. Rather than endorse the 1949 Geneva Convention and, as Chilean President Michelle Bachelet did recently, call for the FARC to immediately release its victims without conditions, Mrs. Kirchner pressured the Colombian head of state to be more forthcoming. In other words, she took the same line as Mr. Chávez and the FARC, insisting that Mr. Uribe is the barrier to progress.

Mrs. Kirchner may have domestic political reasons for avoiding the subject of the Geneva Convention. Her government -- and her husband's before her -- relies on allies, advisers and cabinet members who are former members of Argentine terror groups that made a living from kidnapping in the 1970s. If the FARC is guilty of violating the convention, so too are many kirchneristas.

If she has a debt with Mr. Chávez, she now has an additional motivation for trying to place blame on Mr. Uribe rather than the terrorists. Mr. Chávez makes no secret of his support for the FARC or his enmity for Mr. Uribe. The FARC leadership hangs out in Caracas and runs its drugs through Mr. Chávez's backyard. If he wanted to free the hostages for purely humanitarian reasons, he could have already done so. The guerrillas need passage through Venezuelan territory and could be brought to heel anytime Mr. Chávez wants.

Mr. Uribe may have made a big mistake by even considering a hostage negotiation with the FARC. The rebels have never suggested that they are interested in peace. They want to trade their "political" captives -- police, soldiers, politicians and three American contractors -- for a strategic gain that will enhance the efficiency of their narcotics and kidnapping businesses. In light of this reality, Mr. Uribe would have been better off sticking to a policy of no talks with terrorists.

But the Colombian government is under intense pressure from French President Nicolas Sarkozy and hostage family members, so he gambled on opening a dialogue. He took an even bigger risk by agreeing to allow Mr. Chávez to act as a negotiator. The Venezuelan president almost immediately violated the ground rules by attempting to talk directly with the military. His goal was to secure the guerrillas' No. 1 demand, a new rebel territory guaranteed free of Colombian forces. Mr. Uribe promptly and wisely fired the Venezuelan "negotiator," but now he finds himself under renewed pressure from Mrs. Kirchner to do more to satisfy the demands of the narcotraffickers.

According to local news reports, in her meeting with Mr. Uribe, Mrs. Kirchner showed no appreciation of Colombia's latest concession to the FARC, to allow an internationally observed, demilitarized zone of 150 square kilometers for 30 days in order to exchange 500 FARC insurgents that the government holds for the hostages. The FARC has also ignored the offer.

Nor does the Argentine president seem interested in getting to the bottom of the "suitcase affair." Instead, an enraged Mrs. Kirchner went before television cameras last week and played the gender card. "This president may be a woman but she is not going to allow herself to be pressured," she said in reference to U.S. antipathy toward her friend, Mr. Chávez.

Her attitude can't be too comforting to Colombians, men or women, who live with the FARC terror that Mr. Chávez and now Mrs. Kirchner want to appease.

It was Christmas week in the Colombian city of Villavicencio and the events, as they were set to unfold, had all the makings of a Hollywood blockbuster. If only the "heroes" hadn't been exposed as liars.

A 3-year-old boy, his mother and another woman, all hostages of the Revolutionary Armed Forces of Colombia (FARC), were about to be freed. Credit for their release was to go to Hugo Chávez, president of Venezuela. Former Argentine President Néstor Kirchner had flown up from Buenos Aires to take part in the show. Oscar-winning director Oliver Stone was on hand too, eager to document the Christmas spirit of the revolutionary killers and their socialist sympathizers. The child, as luck would have it, was called Emmanuel.

WSJ's Americas columnist Mary Anastasia O'Grady discusses the series of embarrassments that have befallen Venezuelan President Hugo Chavez in recent months. The part of the villain was bestowed on Colombian President Álvaro Uribe, a U.S. ally who as a matter of policy has refused to give in to FARC demands for Colombian territory in exchange for the release of hostages. Mr. Uribe had also recently announced that Mr. Chávez was no longer welcome as a negotiator in the broader effort to free former presidential candidate Ingrid Betancourt, three American contractors and 41 other politically valuable FARC hostages. He had jerked away the welcome mat after Mr. Chávez tried to bypass him and talk directly to the Colombian military. According to the script, even Mr. Uribe's stubbornness couldn't stop the big-hearted Mr. Chávez from winning the freedom of these three.

For Mr. Stone, an anti-American Christmas miracle was in the offing. His film would portray Mr. Chávez as a humanitarian hero while demonizing Mr. Uribe. But it wasn't to be an obscure foreign film with no American message. It would also complement the assertions of U.S. unions, other trade protectionists and President Bush's political adversaries, all of whom insist -- against the evidence -- that the Colombian president violates human rights.

Of course, the American left's current obsession with Mr. Uribe is not really about concern for human life. It's about the pending U.S.-Colombian free trade agreement, which they want to kill on "moral" grounds. Depicting Mr. Uribe as an intransigent right-winger is critical to their narrative. In this, the protectionists are allies of the rebels. The truth is that Mr. Uribe's restoration of law and order in Colombia has thrown the guerrillas back on their heels, and they are now frantically pulling the levers of international propaganda.

Over Christmas week the suspense surrounding the promised release was building. Mr. Chávez reminded TV viewers daily that his dramatic rescue plan had nothing to do with him and everything to do with his tender concern for the hostages. Mr. Uribe had agreed to allow Venezuelan aircraft to swoop into Colombia to pick up the two women and the child. The FARC had only to say where. But no word came.

The rebels blamed the delay on bad weather and on Mr. Uribe, who they said had mobilized his armed forces in the area. Mr. Uribe denied the charge, as did his top military commander. Mr. Chávez said Mr. Uribe could not be trusted. Meanwhile the Venezuelan minister for FARC relations, Ramon Rodríguez Chacín, made excuses for the rebels, who, he said, had to be ready for Colombian military actions against them after the handover. The guerrillas, he said, should "prepare their retreat strategy and take all the security measures they need."

Finally, on Dec. 31, Mr. Uribe held a press conference to give his "hypothesis" of why the liberation hadn't occurred: The FARC had lied when it said it had the child, and it had been trying to buy time to find him. In fact, the boy was in a foster home in Bogotá. The suggestion was a bombshell, but after DNA tests confirmed the fact, Mr. Uribe was vindicated.

Among the more shocking revelations was the FARC's inhumane treatment of the infant. His mother, Clara Rojas, who had been Ms. Betancourt's vice presidential running mate, was kidnapped in 2002. The child was born in a rebel camp in 2004, and was less than one year old when he was left with a local peasant. After about a month, his humble caretaker realized he could not treat the child's serious illnesses and took him to a local clinic, which transferred him to a hospital.

Press reports say that doctors diagnosed the baby with anemia, malaria, a parasitic skin disease, malnutrition and an arm that had been broken at birth and not treated. "Anyone would have fallen apart before this child, with so many diseases," the hospital director told the Miami Herald. "He didn't raise his eyes. He got toys but did not pick them up. He did not stand but dragged himself on his butt. He cried but no tears came because of the malnutrition."

When the news of the child's whereabouts broke Mr. Stone went away spitting mad, not at his FARC heroes, who had been exposed as child abusers, but at Mr. Uribe and Mr. Bush. Of the FARC he said, "Grabbing hostages is the fashion in which they can finance themselves and try to achieve their goals, which are difficult. I think they are heroic to fight for what they believe in and die for it, as was Castro in the hills of Cuba."

Meanwhile, with Mr. Chávez looking like a fool, the two women were finally freed on Thursday. The FARC had reason to help him try to salvage his image: As this column has frequently noted, it needs Venezuela as its main transit route for cocaine and as a safe haven.

Mr. Chávez tried to paint himself as a neutral, third-party peacemaker but a day later he peeled off his mask. We already knew that a diplomat from Cuba, which has been sowing terror in Colombia for 50 years, accompanied the hostages to Caracas, underscoring the ties between Mr. Chávez, Cuba and the rebels. We also knew that as the helicopter carrying the hostages took off Mr. Rodríguez Chacín called to the rebels, "keep up the fight and count on us!"

On Friday, Mr. Chávez went further, arguing that the FARC has a "true" army that "occupies space" and is therefore a "belligerent" -- a term that would give it standing under international law. He demanded that its terrorist status be revoked. Colombia called his speech "off-the-wall" but it knows better. Following the hostage release, this was a calculated move and is only the latest step in what is now Mr. Chávez's war, waged by the FARC, against Colombia.

By Drew Benson and Bill FariesOct. 21 (Bloomberg) -- Argentine bond yields soared above 24 percent and stocks sank the most in a decade on speculation the government will seize private pension funds and use the assets to stave off the second default this decade. President Cristina Fernandez de Kirchner will unveil a new pension fund plan at 4 p.m. New York time today, the country's social security administration said in a statement. Fernandez will nationalize the system, giving the government control of $29 billion in retirement accounts, La Nacion reported, citing government officials it didn't identify. ``It's horrible,'' said Jaime Valdivia, who manages $1 billion of assets for Emerging Sovereign Group in New York. ``We're going back to the dark ages. Not even in times of the worst financial stress did the government ever think about taking over the private pension system.'' Fernandez has struggled to raise cash to cover growing financing needs as the global financial crisis drives down prices on the country's commodity exports and erodes demand for higher- yielding, developing-nation debt. The government's borrowing needs will swell to as much as $14 billion next year from $7 billion in 2007, RBC Capital Markets, a Toronto-based unit of Canada's largest bank, said today. Yields on the government's 8.28 percent bonds due in 2033 surged 4.35 percentage points to 24.77 percent, the highest since the country issued the debt in a 2005 restructuring, according to JPMorgan Chase & Co. The bond's price sank 7.9 cents to 29 cents on the dollar, leaving it just pennies above the price on defaulted debt that investors held out of the 2005 renegotiation. $95 Billion Debt Default Argentina's benchmark Merval stock index tumbled as much as 13.8 percent today to a four-year low, extending its losses this month to 37 percent. The South American country hasn't had access to international capital markets since it defaulted on $95 billion of bonds in 2001. Holders of some $20 billion of those bonds rejected the government's 2005 payout of 30 cents on the dollar, the harshest sovereign restructuring since World War II. The social security administration didn't provide details on today's announcement. The press offices at the presidential palace and the pension fund regulator declined to comment when contacted by Bloomberg News. ``This is negative, very negative, for the markets,'' said Mariano Tavelli, a portfolio manager at Tavelli & Compania in Buenos Aires. ``It's going to cause a sharp drop in confidence in the country and this government.'' `Last-Ditch Measure' Nestor Kirchner, Fernandez's husband and predecessor, began tightening restrictions on private pension funds last year, requiring them to keep more investments in the country as part of an effort to sustain a five-year-old economic expansion. Argentina created the private accounts in 1994 with the aim of phasing out the government-run system. A government takeover of the accounts would probably require congressional approval, Tavelli said. Argentina's private pension fund administrators managed 94.4 billion pesos ($29 billion) in savings at the end of September. About 55 percent of the investments are in government debt, according to the pension fund regulator's Web site. Nationalization would allow the Fernandez administration to write off the government bonds held by the funds, said Javier Salvucci, an analyst with Buenos Aires-based Silver Cloud Advisors. ``The government is explicitly saying that it has problems meeting debt maturities and this is a last-ditch measure to do so,'' Salvucci said. ``For accounting purposes, this debt will no longer exist.'' Central Bank Intervention Argentine bonds have lost 37 percent this year, putting them on pace for the worst year since the 2001 default, according to a Merrill Lynch & Co. index. The bonds lost 62 percent that year. A pension funds takeover may add to capital flight as Argentines seek the safety of U.S. dollars, RBC said Capital Markets said in today's report. The peso was little changed today, rising 0.2 percent to 3.2163 per dollar, as traders said the central bank intervened in the foreign exchange market to shore up the currency. The bank sold ``large amounts'' of dollars, said Gustavo Quintana, a trader with Lopez Leon Brokers in Buenos Aires. A central bank spokesman didn't return a phone call seeking comment. The cost of protecting Argentina's bonds against default soared. Five-year credit-default swaps based on Argentina's debt jumped 1.57 percentage points to 31.18 percentage points, according to Bloomberg data. Credit-default swaps, contracts to protect against or speculate on default, pay the buyer face value should a borrower fail to adhere to its debt agreements. `Closer to the Abyss' That price means it costs $3.118 million to protect $10 million of the country's debt from default. In September 2006, it cost just $244,000 as record exports of wheat, soybeans and corn fueled economic growth and swelled government coffers. Commodities have dropped 40 percent from a record high reached on July 2 as the global financial crisis has deepened a global economic slowdown, according to UBS Bloomberg CMCI Index of 26 raw materials. Growth in South America's second-biggest economy, which gets more than half its export revenue from commodities, will slow to 5 percent this year and 2.5 percent in 2009, RBC Capital Markets said. The economy expanded 8.8 percent on average over the past five years as Kirchner and Fernandez used surging tax receipts to boost government spending on everything from civil servant pay rises to energy subsidies. ``Argentina is ever closer to the abyss,'' RBC said in the report. To contact the reporters on this story: Drew Benson in Buenos Aires at Abenson9@bloomberg.netBill Faries in Buenos Aires wfaries@bloomberg.net;

Argentina's President Cristina Kirchner announced plans to nationalize Argentina's private pension funds. Speculation that the move was imminent sent the country's stocks down 11%. The government said the takeover of the private system aimed to protect investors from losses due to the global market turmoil. But economists said the underlying motive would be to provide the government with about $5 billon in annual pension contributions that it needs to plug a gap in financing next year and avert a debt default.

MAURICIO LIMA/AFP/Getty ImagesEcuadorian President Rafael CorreaSummaryIn the wake of a default on international debt, Ecuador is already borrowing from its own Social Security Institute. At the same time, the country is imposing all oil production cuts related to its membership in the Organization of the Petroleum Exporting Countries on foreign investors — a decision that will alienate foreign direct investment. The two moves together bring Ecuador closer to economic crisis.

AnalysisEcuador is due to sell a $500 million tranche of debt to the country’s Social Security Institute (IESS) on Dec. 29, bringing the government’s total domestic borrowing to $1.2 billion in the past week. The move follows Ecuadorian President Rafael Correa’s announcement that his government would default on $3.9 billion worth of debt owed on international credit markets. At the same time, Ecuador is poised to force foreign energy investors to absorb Ecuador’s portion of the production cut agreed on by the Organization of the Petroleum Exporting Countries (OPEC). Combined, the moves bring Ecuador closer to the brink of economic crisis.

Ecuador’s decision to default on its debt made it the first developing country to use default as a way of managing its options in the wake of the international financial crisis. The move exacerbates Ecuador’s isolation from an already risk-averse international capital market, and will make it very difficult for the country to cover its expenses.

With no access to international capital, the government’s only option for borrowing is the domestic capital market, which is limited to Ecuadorian banks and lending institutions such as the IESS. But the market is extremely small, particularly given that Ecuador uses the U.S. dollar as its national currency and has no recourse to monetary expansion as a method of broadening its spending options.

Although Ecuador may be forced to drop the dollar, in the meantime it is limited to the pools of dollars that already exist. The capacity of the IESS is quite limited, as social security taxes only amount to about $1.9 billion per year. With the government already purchasing $1.2 billion, this option will be quickly exhausted. Furthermore, the government is also rapidly depleting foreign reserves, which fell 8.4 percent Dec. 19 from a week earlier, to $4.8 billion.

The country’s largest pool of capital (and likely the next stop for the government) is the banking industry, which is worth about $18.8 billion, or about 30 percent of the country’s gross domestic product. But the banking industry has already expressed nervousness about the current economic situation, and the government’s complete reliance on the small sector could quickly exhaust the banks’ resources. Furthermore, the government’s absorption of all domestic capital will make it impossible for private businesses to borrow, which will stifle the private sector as it attempts to adjust to a declining economy.

The government’s budgetary stress is exacerbated by the fact that the price of oil — a major export commodity for Ecuador — has fallen dramatically. As a member of OPEC, Ecuador is obligated to cut production alongside fellow OPEC members in an attempt to raise the international price of oil. This further reduces Ecuador’s options for revenue. The Correa administration has decided to implement the cuts, but only through reductions in foreign firms’ production quotas.

Ecuador’s decision to place the entire burden of OPEC cuts on foreign companies will hit Ecuador’s only other source of foreign capital: foreign direct investment. It does make a certain kind of sense for Ecuador to force private companies to absorb the production cuts. Ecuador relied on oil revenues for about 39 percent of its 2008 budget, which totaled just under $16 billion, and most of that revenue came from the country’s state-owned energy company Petroecuador. Thus, enforcing OPEC cuts on the state company could hurt the budget severely in the short term. But by targeting foreign investors, Correa is courting a long-term economic decline.

Ecuador’s options are severely limited in the wake of the financial crisis and the default. With oil prices plunging and access to international credit gone, the government will have to scrounge for funding sources. A complete reliance on domestic capital and the alienation of international investors appear increasingly likely to bring Ecuador close to yet another economic crisis.